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What is the journal entry to record an early pay discount?

Some companies offer an early pay discount to their customers if they pay the invoice early. For example, if the invoice is due within 30 days, then the company might offer a 5% discount if they pay within 10 days. The terms would be 5/10, net 30. So if the company pays within 10 days, they get the 5% discount. If they don’t pay within 10 days, they won’t get the discount, so they might ass well wait to pay until 30 days comes.

When the invoice is received, the company would debit the expense and credit accounts payable. When the company elects to take the early pay discount, they would debit accounts payable for the full invoice amount, then record a credit to early pay discount and the remaining amount to cash (the early pay discount reduces the amount of cash the company must pay).


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