What are Accounting Payment Terms?

Accounting payment terms are the payment rules imposed by suppliers on their customers. Payment terms are imposed to ensure that payments are received by suppliers within a reasonable period of time. A large customer may use its purchasing power to force a supplier to agree to terms that are more favorable to the customer, such as a longer period of time in which to pay the supplier, or relaxed rules for returning goods.

Types of Invoice Payment Terms

A number of payment terms should be included on any invoice sent to a customer. A complete set of terms is needed to clarify the payment situation for the customer, thereby increasing your odds of being paid. The key invoice payment terms are as follows:

Invoice date. This is the date on which the invoice was prepared. It may instead reflect the date on which goods were shipped or services provided, if this date was earlier than the invoice preparation date.
Payment due date. This is the date on which you expect to receive payment from the customer. Thus, if the terms state that the customer has 30 days in which to pay an invoice, the expectation is that you will receive payment 30 days from the invoice date.
Invoice number. This is the unique identifier code for the invoice. It is needed to track the invoice in your own system, as well as in the accounting system of the customer.
Payment amount. This is a multi-line item that states the preliminary total due for payment, plus any sales tax, plus any shipping and handling charges, which sum to a grand total amount payable.
Payment methods allowed. This is the types of payment accepted, such as by check, credit card, ACH, or wire transfer.
Discount terms. If you offer a discount in exchange for early payment, then state the terms. We cover this issue more fully below.
Currency type. If you are dealing with an international customer, then state the currency in which you expect to be paid. This is less necessary if all of your sales are domestic.

Related AccountingTools Courses

Accountants’ Guidebook

Payables Management

Discount Payment Terms

Discount terms may be allowed in order to accelerate cash collections. There are three possible components to discount payment terms, which are noted below:

Discount terms. Discount terms are provided as a two-part statement, where the first item is the percentage discount allowed, and the second item is the number of days within which payment can be made in order to receive the discount. Thus, terms of "1/10" mean that a discount of 1% can be taken if payment is made within 10 days.
Net terms. "Net" means that the full amount is due for payment. Thus, terms of "net 20" mean that full payment is due in 20 days. The term may be abbreviated to "n" instead of "net".
End of month terms. The abbreviation "EOM" means that the payer must issue payment within a certain number of days following the end of the month. Thus, terms of "net 10 EOM" mean that payment must be made in full within 10 days following the end of the month.

The following table contains a number of standard accounting payment terms, what they mean, and the effective annual interest rate being offered (if any).

Credit
Terms

Explanation
Effective
Interest

Net 10
Pay in 10 days
None

Net 30
Pay in 30 days
None

Net EOM 10
Pay within 10 days of month-end
None

1/10 Net 30
Take 1% discount if pay in 10 days, otherwise pay in 30 days
18.2%

2/10 Net 30
Take 2% discount if pay in 10 days, otherwise pay in 30 days
36.7%

1/10 Net 60
Take 1% discount if pay in 10 days, otherwise pay in 60 days
7.3%

2/10 Net 60
Take 2% discount if pay in 10 days, otherwise pay in 60 days
14.7%