Great video, this is also how I explain it to my supply chain students: Students: Read: Do you know what this means? 2/10 net 30 (now employers want you to be Finaciers!!??) The good news is that they will pay more for more strategic skills... A Purchase Order is a contract between a buyer and supplier. Over half of our students get their first full-time jobs in procurement/purchasing/sourcing in a buyer type of role. One of those job responsibilities will be to negotiate payment terms upon which you pay a supplier. When you pay for a product or service in your own personal life, you typically pay for it upon receipt or delivery of the good/service. However, in business-to-business transactions, the supplier usually does not get paid right away. Usually, the buyer will receive the goods/parts/material first, and then the buyer will pay for it later, sometimes very later. Buying organizations are often cash strapped, or simply put, they are cheap and greedy. Buyers will try to negotiate not paying for something as long as 30, 60, 90, 120 days after they actually get the stuff. Suppliers are not thrilled with this, but if you trust the buyer and know that you will eventually get paid, why not? Usually, large buying organizations have this kind of leverage over smaller suppliers. So, what is the current standard protocol for payment terms with buyers and suppliers? See below. • 2/10 net 30 - 2% discount if paid within 10 days, full payment required within 30 days So, if you buy $100 worth of parts from a supplier, you have to pay them at the latest, $100 30 days after you get the parts. However, if you pay them within ten days of getting the parts, you only pay $98. Here is the thinking part of this reading assignment. I think there are a lot of VP’s of SCM and VP’s of Finance that are not talking to each other very much. My impression is that most companies are obsessed with negotiating payment terms with net 30, 60, 90, and 120 days. This makes sense to me if a company is cash strapped, but I do not think most are. It also makes sense if you are broke and would have to borrow from a bank to pay the supplier (and if the cost of borrowing is really high). So, wait as long as possible to pay the supplier with our own cash (and hopefully you can make enough money in 30-120 days to pay your suppliers). If you cannot, then you have major cash flow issues and your margins are probably too tight to keep you in business. In which case, the bank might not even loan you any money. I think most companies have some cash on the sidelines (The Great Recession of 2008) and why would you sit on that cash for 30, 60, 90, and 120 days? Why not pay your suppliers early and make cash (in the form of discounts - a dollar saved is the same as adding one dollar of pre-tax profit to your company’s bottom line). You might argue that keeping the money in the bank and collecting interest on it makes you more than the price discount that the supplier is willing to give you for early payment. However, here is my point - have you seen how low interest rates are and how low the cost of borrowing is in America? They are at record lows! You can borrow money to buy a house and only pay 2-3% in interest today. So, what is the strategic SCM opportunity here? How about this: • 4/10 net 30 - 4% discount if paid within 10 days, payment required within 30 days Let’s say you could actually negotiate these payment terms with a supplier, which I think they would go for if they could get their money sooner, especially if you are a buyer that does not pay them until 30, 60, 90, or 120 days out. As a buyer, even if you did not have the cash to pay them within 10 days, couldn’t you even borrow money from a bank to pay early? You still come out ahead because your cost of borrowing from the bank (1-3%) is less than the discount given to you by the supplier (4%). I also bet you there a lot of banks out there that would do all of this for you (all you have to do is sit back and enjoy the cost savings, and look like a superstar to your boss). SCM is a very cross-functional discipline. Effective SCM requires working with your suppliers, their suppliers, your customers, their customers, and internally with engineering, sales/marketing, and even finance. For the first time in American history, interest rates and the cost of borrowing is at record lows, combined with money actually out there in the system to be borrowed. I personally feel corporate America (on the procurement side) is leaving money on the table with its antiquated payment terms with suppliers. I hope this makes sense to you. Please let me know if not. Thank you. Sime Dr. Sime (Sheema) Curkovic, Ph.D., Valluzzo & Lee Honors College Faculty Fellow Professor, Operations/Supply Chain Management Western Michigan University, Haworth College of Business Schneider Hall Room 3246, Kalamazoo, MI 49008-5429 Tel.: 269.387.5413; E-Mail: sime.curkovic@wmich.edu "Better, faster, cheaper"; www.wmich.edu/supplychain "WMU Integrated Supply Management (ISM)...Nation's best undergraduate SCM program (Gartner 2014); 2nd in SCM technology (SoftwareAdvice 2015); 2nd in top global SCM talent (SCM World 2017) Vitae: www.wmich.edu/sites/default/files/curriculum-vitae/CurkovicVitae2017_0.pdf Sample Lectures & Should You Major in Supply Chain Management? wmich.edu/supplychain/academics/lectures
i finally understand this! THANK YOU SO MUCH! I have my final exam later on today and i'm just going over my notes, i hope i remember this on the exam.
@PiinkBunniie I think it has something to do with how you would want to keep track of the discounts your business is taking advantage of, and which it is losing. When you credit inventory 30 dollars, you lose track of the value gained by taking advantage of the discount. Either is correct, but they serve different purposes within a business.
lots of thanks to you, but i have question as we have credited 30 because we did not pay it ,so rather than writting inventory can't we write "discount" as we got discount and it is like revenue for us? thank you
In my class .. when we pay the balance .. we do a debit to A/R .. and a credit to cash and sales discounts and allowences, instead of inventory .. is that still the same thing? or is there a difference for the accounts that you credit depending whether you are the purchaser or buyer?
my transaction says purchased goods on account 70,000 with terms: less 10,000 n/40, 5/15 and FOB shipping point..... im confused on how i should record this
The inventory wasn’t debited there, it is just the left over from 1500 - 30(CR) =1,470 of Inventory left. In fact, the inventory at the end (last item as you said) is being credited (CR), so as to balance the Invy account. DR. Inventory. $1,500 CR. Cash. $1,470 CR. Inventory. $30 I was also told by my own tutor to write “CR. Purchase Discount $30” instead, but think about it - if we write PD then what about subsequently doing up the Ledger/T-account for this Inventory account? It will look weird because you recorded it as a “purchase discount of $30” instead of an “inventory of $30”. Since you don’t recognise it as an “inventory record input” but a “purchase discount”, then you cannot put the $30 as inventory into the Inventory ledger account anymore... Which does not make sense also.
How then would you record it under the Accounts Payable Subsidiary Ledger? Because if the creditor was owed $1500 (a credit) but received the discounted amount of $1470 (a debit), how would the A/P subsidiary ledger balance to reflect nothing is outstanding?
1% off of cost-if paid in 10 days- or total cost due within 30 days. Debit Purchase Discounts for the allowable discount of 1%, Debit Purchases for the full cost. Credit Cash for the discounted payment. You see you are saving the company money by taking part of the discount process-which saves the company money. So it is a debit (you are keeping money in the Cash account) Purchases are an Asset as well. Although, Purchase Returns are a Credit to the Purchases account and a Debit to Account Payable account- to lower the liability to the Accounts Payable account-to which the company owes less for the purchases, (because of the Purchase Return). This is how I understand it to work .
What if you don't pay after 30 days? I just don't get why the 30's there because you obviously pay the full amount asap after missing the 10 day discount. Guess what I'm trying to say is you'd pay the full amount on days 11-30 so what's the reason for the 30? Is interest charged after that?
An invoice for $7,500 dated March 5, terms 4/10, net 60, was partially paid on March 10 such that the balanceowing on the invoice was reduced to $2,500. What was the amount of payment on March 10? I keep getting $4,800 but the answer says $4,750. Please help
okay.! so I am confused a Lil bit.. because in Indian Accounts if we get a discount on any purchased item we do put it on credit side but the account name we write is discount received. and I believe everyone here knows that discount received is a type of income for your business that's why we write it on the credit side because Income is Credit..... now can anyone explain to me why it is an inventory account.? For Example: if I purchased an inventory in credit and I pay the money within 10 days am getting a 2% discount. after I paid the money the journal would be like this Creditor A/c Dr. xx to Cash A/c xx to discount received A/c xx and before that, the journal should look like this inventory A/c Dr. xx to creditors A/c xx but here our Sir is saying that it would be inventory A/c. How and why.? please I didn't get it
@@yezanhussein Hi Yezan, what you said makes sense actually, but why do some people Credit "Discount Received" instead of "Inventory"? Your help will be highly appreciated, thank you!
It's so funny. I let the ads run even when it allows me to skip because Matt has helped me so much. We appreciate you Matt!!!
Does not skipping ads help the channel? I didn't know that...
@@steezmonster92 Yeah, It does and provide little bit more revenue.
just to remind you 5 years latter if u are still in youtube
Great video, this is also how I explain it to my supply chain students:
Students:
Read: Do you know what this means? 2/10 net 30 (now employers want you to be Finaciers!!??) The good news is that they will pay more for more strategic skills...
A Purchase Order is a contract between a buyer and supplier. Over half of our students get their first full-time jobs in procurement/purchasing/sourcing in a buyer type of role. One of those job responsibilities will be to negotiate payment terms upon which you pay a supplier. When you pay for a product or service in your own personal life, you typically pay for it upon receipt or delivery of the good/service. However, in business-to-business transactions, the supplier usually does not get paid right away. Usually, the buyer will receive the goods/parts/material first, and then the buyer will pay for it later, sometimes very later. Buying organizations are often cash strapped, or simply put, they are cheap and greedy. Buyers will try to negotiate not paying for something as long as 30, 60, 90, 120 days after they actually get the stuff. Suppliers are not thrilled with this, but if you trust the buyer and know that you will eventually get paid, why not? Usually, large buying organizations have this kind of leverage over smaller suppliers. So, what is the current standard protocol for payment terms with buyers and suppliers? See below.
• 2/10 net 30
- 2% discount if paid within 10 days, full payment required within 30 days
So, if you buy $100 worth of parts from a supplier, you have to pay them at the latest, $100 30 days after you get the parts. However, if you pay them within ten days of getting the parts, you only pay $98. Here is the thinking part of this reading assignment. I think there are a lot of VP’s of SCM and VP’s of Finance that are not talking to each other very much. My impression is that most companies are obsessed with negotiating payment terms with net 30, 60, 90, and 120 days. This makes sense to me if a company is cash strapped, but I do not think most are. It also makes sense if you are broke and would have to borrow from a bank to pay the supplier (and if the cost of borrowing is really high). So, wait as long as possible to pay the supplier with our own cash (and hopefully you can make enough money in 30-120 days to pay your suppliers). If you cannot, then you have major cash flow issues and your margins are probably too tight to keep you in business. In which case, the bank might not even loan you any money.
I think most companies have some cash on the sidelines (The Great Recession of 2008) and why would you sit on that cash for 30, 60, 90, and 120 days? Why not pay your suppliers early and make cash (in the form of discounts - a dollar saved is the same as adding one dollar of pre-tax profit to your company’s bottom line). You might argue that keeping the money in the bank and collecting interest on it makes you more than the price discount that the supplier is willing to give you for early payment. However, here is my point - have you seen how low interest rates are and how low the cost of borrowing is in America? They are at record lows! You can borrow money to buy a house and only pay 2-3% in interest today. So, what is the strategic SCM opportunity here? How about this:
• 4/10 net 30
- 4% discount if paid within 10 days, payment required within 30 days
Let’s say you could actually negotiate these payment terms with a supplier, which I think they would go for if they could get their money sooner, especially if you are a buyer that does not pay them until 30, 60, 90, or 120 days out. As a buyer, even if you did not have the cash to pay them within 10 days, couldn’t you even borrow money from a bank to pay early? You still come out ahead because your cost of borrowing from the bank (1-3%) is less than the discount given to you by the supplier (4%). I also bet you there a lot of banks out there that would do all of this for you (all you have to do is sit back and enjoy the cost savings, and look like a superstar to your boss).
SCM is a very cross-functional discipline. Effective SCM requires working with your suppliers, their suppliers, your customers, their customers, and internally with engineering, sales/marketing, and even finance. For the first time in American history, interest rates and the cost of borrowing is at record lows, combined with money actually out there in the system to be borrowed. I personally feel corporate America (on the procurement side) is leaving money on the table with its antiquated payment terms with suppliers. I hope this makes sense to you. Please let me know if not. Thank you. Sime
Dr. Sime (Sheema) Curkovic, Ph.D., Valluzzo & Lee Honors College Faculty Fellow
Professor, Operations/Supply Chain Management
Western Michigan University, Haworth College of Business
Schneider Hall Room 3246, Kalamazoo, MI 49008-5429
Tel.: 269.387.5413; E-Mail: sime.curkovic@wmich.edu
"Better, faster, cheaper"; www.wmich.edu/supplychain
"WMU Integrated Supply Management (ISM)...Nation's best undergraduate SCM program (Gartner 2014); 2nd in SCM technology (SoftwareAdvice 2015); 2nd in top global SCM talent (SCM World 2017)
Vitae: www.wmich.edu/sites/default/files/curriculum-vitae/CurkovicVitae2017_0.pdf
Sample Lectures & Should You Major in Supply Chain Management?
wmich.edu/supplychain/academics/lectures
if ı pass my exam, i'll thumps up for all of your videos man... u are the best
thank you thank you thank you! seriously, so grateful to have found your videos.
Thank you, Mr. Matt. You are a lifesaver.
I love your videos. You explain it so much better! I use you as my study tool for my accounting tests. Please keep doing what your doing! :)
thanks from Vietnam, You like a hero who save a lot of people.
Thank you for posting this!!!!!!!!
Somebody get this man a bigger white board!
Thank you very much prof on your simply explain
With you student from cairo univercity english commerce
i finally understand this! THANK YOU SO MUCH! I have my final exam later on today and i'm just going over my notes, i hope i remember this on the exam.
@PiinkBunniie I think it has something to do with how you would want to keep track of the discounts your business is taking advantage of, and which it is losing. When you credit inventory 30 dollars, you lose track of the value gained by taking advantage of the discount. Either is correct, but they serve different purposes within a business.
I wish you were my teacher. Thank you for explaining everything here.
you are an excellent doctor. Keep it up Sir. Thanks a lot .
You are my hero ❤
Thanks !!! From Los Angeles.
Thank you so much.....from Pakistan
Sir, You're an awesome teacher. Love your vids. tfs.
This clears up so much, thanks!
lots of thanks to you, but i have question
as we have credited 30 because we did not pay it ,so rather than writting inventory can't we write "discount" as we got discount and it is like revenue for us?
thank you
thank you so much! it all makes sense now!
In my class .. when we pay the balance .. we do a debit to A/R .. and a credit to cash and sales discounts and allowences, instead of inventory .. is that still the same thing? or is there a difference for the accounts that you credit depending whether you are the purchaser or buyer?
Thanks Sir, I'm new to all of this, but Loving it!
Thank you!
That was really helpful! Thank you!!
my transaction says purchased goods on account 70,000 with terms: less 10,000 n/40, 5/15 and FOB shipping point..... im confused on how i should record this
Can The last inventory item be changed into purchase discount?
I still can't figure out why the inventory was debited here
the same matter i was wonder i thought that muse be recognize other revene or discount
The inventory wasn’t debited there, it is just the left over from 1500 - 30(CR) =1,470 of Inventory left.
In fact, the inventory at the end (last item as you said) is being credited (CR), so as to balance the Invy account.
DR. Inventory. $1,500
CR. Cash. $1,470
CR. Inventory. $30
I was also told by my own tutor to write “CR. Purchase Discount $30” instead, but think about it - if we write PD then what about subsequently doing up the Ledger/T-account for this Inventory account?
It will look weird because you recorded it as a “purchase discount of $30” instead of an “inventory of $30”.
Since you don’t recognise it as an “inventory record input” but a “purchase discount”, then you cannot put the $30 as inventory into the Inventory ledger account anymore...
Which does not make sense also.
YEEZY WHO?....YOU THE GOAT MATT!!!
This was helpful
thanks man your videos are great :D
thank you! very helpful.
THANK YOU.
How then would you record it under the Accounts Payable Subsidiary Ledger? Because if the creditor was owed $1500 (a credit) but received the discounted amount of $1470 (a debit), how would the A/P subsidiary ledger balance to reflect nothing is outstanding?
1% off of cost-if paid in 10 days- or total cost due within 30 days. Debit Purchase Discounts for the allowable discount of 1%, Debit Purchases for the full cost. Credit Cash for the discounted payment. You see you are saving the company money by taking part of the discount process-which saves the company money. So it is a debit (you are keeping money in the Cash account) Purchases are an Asset as well. Although, Purchase Returns are a Credit to the Purchases account and a Debit to Account Payable account- to lower the liability to the Accounts Payable account-to which the company owes less for the purchases, (because of the Purchase Return). This is how I understand it to work .
Thank u very helpful
thank you so much, very clear.
What if you don't pay after 30 days? I just don't get why the 30's there because you obviously pay the full amount asap after missing the 10 day discount. Guess what I'm trying to say is you'd pay the full amount on days 11-30 so what's the reason for the 30? Is interest charged after that?
Yes. After 30 days, there will be late fees.
must be perpetual right? since he's debiting inventory rather than purchase discounts. Correct me if im wrong.
An invoice for $7,500 dated March 5, terms 4/10, net 60, was partially paid on March 10 such that the balanceowing on the invoice was reduced to $2,500. What was the amount of payment on March 10? I keep getting $4,800 but the answer says $4,750. Please help
last 2 step "discount received" would be more appropriate instead of inventory
In case, the inventory still value $1500 but you received a discount from the supplier.
Very helpful
nvm you answered this question for me in the next video =)
okay.! so I am confused a Lil bit.. because in Indian Accounts if we get a discount on any purchased item we do put it on credit side but the account name we write is discount received. and I believe everyone here knows that discount received is a type of income for your business that's why we write it on the credit side because Income is Credit..... now can anyone explain to me why it is an inventory account.? For Example: if I purchased an inventory in credit and I pay the money within 10 days am getting a 2% discount. after I paid the money the journal would be like this
Creditor A/c Dr. xx
to Cash A/c xx
to discount received A/c xx
and before that, the journal should look like this
inventory A/c Dr. xx
to creditors A/c xx
but here our Sir is saying that it would be inventory A/c. How and why.? please I didn't get it
very helpful thank you
Mc-Graw Hill ?
Hi,, can any one answer me please ?
why did he credit the 30$ for the inventory ?? i didn't get it :/!! , anyway his explanation is so good
+Heba Abdullah you have to record inventory at the cost value which was paid for it, under GAAP the cost principle.
@@yezanhussein Hi Yezan, what you said makes sense actually, but why do some people Credit "Discount Received" instead of "Inventory"? Your help will be highly appreciated, thank you!
So, is this perpetual system?
yes
THANK YOU
Here applying for a account payable job
Why can't we introduce a discount received account?
How about the purchase discount account
Isn't it the inventory account title should be discount? Its kind of confusing
You're the shizniz
crediting i mean, not debiting >
Thank you!