Early Payment Discount is a discount that applies to both the customer and Vendor. It is a form of discount that may be deducted from the payment when payment is made before a certain due date.
Businesses often offer discounts to customers who pay their bills early. Does it make financial sense to take advantage of these discounts? The answer to this question in most cases is Yes!
What is Early Payment Discount
When you create an invoice with early payment discount, the customer may deduct a certain percentage of the invoice amount excluding VAT if he pays within a set number of days. The payment discount is therefore a kind of bonus for fast payers.
This principle works both ways, namely when paying your vendors and receiving payments from customers.
While using early payment discount, the discount amount is deducted from the total amount excluding VAT. However, VAT is charged on the full total amount excluding VAT. On the payment discount itself, no VAT may be charged.
- Describes how Payment Discount is arranged in Dynamics Business Central
- The method is explained in a practical scenario
Configuration in Business central
The effect of early payment discount is determined by:
- Payment conditions (percentage / expiry date formula)
- Vendor / Customer Posting Group Settings
- Setting in the Transaction type, linked to the bank account
The payment terms specify the various conditions that can occur when making agreements about payments with customers and suppliers. The payment conditions determine whether there is a payment discount. The percentage is specified and the expiry date formula.
TipWith the button Actions – Translation you can set translations per Payment Term. These translations are taken to documents.
Customer-/Vendor Posting Groups
The ledger accounts to which the Payment Discount amounts will be posted are set in the vendor and customer posting groups.
Payment Discount Tolerance
Finally, it is also possible to set a tolerance for processing the payment discount. This takes place on the General Ledger Setup on the Application tab.
|Pmt. Disc. Tolerance Warning||When this setting is checked, a warning will show when a line with payment discount is issued in the Payment Journals.|
|Pmt. Disc. Tolerance Posting||This setting indicates which G/L Account setting should be looked at in the Vendor-/Customer Posting Groups. By default this field is filled with the Payment Discount accounts.|
|Payment Discount Grace Period||The grace period is specified in this field. In the example below that is 2 days. This means that if there is an expiry date formula of 8 days, then there is still 2 days of grace in which the Payment Discount is still settled.|
In this example, we will create a Purchase Invoice to a supplier which needs to be payd and apply Payment Discount to it.
Purchase Invoice with Payment Discount
A payment condition applies to the created Purchase Invoice at
Fabrikam, Inc. in which case Payment Discount applies. 2% discount for payment within 8 days.
During Posting of the Purchase Invoice, a vendor ledger entry is created. On this vendor ledger entry the expiration date (30 days after the invoice date) is shown, but also the expiration date of the Payment Discount (8 days) and the expiration date of the Payment Discound Tolerance (10 days). The Payment Discount amount is also displayed.
Executing Vendor Payment
Open the Payment Journals and add the Vendor Ledger Entry to pay this particular Entry before 18-04-2019. That is the payment period in which the Payment Discount applies.
When adding the Vendor Ledger Entry to the Payment Journal, the Payment Discount Tolerance Warning pops up. The Paymend Discount will be applied when choosing the first option “Post as Payment Discount Tolerance?”.
To check wether the supposed posting is correct, you can make a Posting Preview (Actions – Posting – Preview Posting).
The Posting Preview window shows the G/L entries to be created after posting the Payment Journal. In this case you can see there’s a specific line with the Payment Discount Amount.
De last step is to Post the entries in the Payment Journals. This is the moment where the Vendor Ledger Entry will be applied and the Payment Discount is posted on the G/L Account.
This ends the scenario.
Further reading on the subject: