Accountancy, Business, and Management (ABM Strand)

Learning Module
Prepared by: Mr. Jeorge Domingo Catalan

Business Mathematics
Topic: Discount, Shipping and Freight
Sub topics: 1. Two kinds of price
2. Two kinds of Discounts
3. Types of Cash discount Terms
4. Shipping terms
5. Freight terms
Objectives
The Salettinian students will be able to:
1. distinguish the kinds of price
2. distinguish the kinds of discounts
3. differentiate the types of cash discount terms
4. familiarize the different shipping terms
5. familiarize the different freight terms

A. (Topic at hand)
a. There are basically two types of sales:
 Retail Sales – these are sales made primarily to the general public, or to a buyer who will
be the ultimate consumer of the purchased items.
 Trade Sales – these are sales made primarily between businesses. The purchasing
business is not the ultimate user of the merchandise; the merchandise is generally resold
to the consumer as a retail sale.
b. What are the terminologies used in pricing?
 List Price -- this is established price determined by references to a catalog or
general price list before deducting any discounts. This was set by the manufacturer or
supplier.
 Invoice price -- this is list price less any trade discounts. This is the gross billable
amount by the seller to the buyer. This is the amount that is indicated in the billing
statement of the seller.
c. What are the types of discounts?
 Trade discount -- also called volume discount or quantity discount, trade discount
pertains to a direct deduction to the invoice price on account of volume purchases made
by the buyer. This discount is usually given when the buyer is a fellow merchandiser in
order to allow him profit for the resale of goods to his customer.
i. This is not usually stated in the published catalog. Instead, the wholesaler or
retailer calculates it using the list price and the discount rate. The discount rate is
a percent of the list price.
ii. Discount rates differ because of the following factors:
 Wholesaler’s and retailer’s purchasing history
 The season
 Condition of the economy
 Whether a product is being discontinued
 Manufacturer’s efforts to encourage volume purchases
 Series of Discounts – In certain instances, a seller grants additional discounts other than
the discount ordinarily given by him or her. For instance, aside from the regular 10%
discount, a seller may grant a special additional discount of 5%. The series of discounts
is, therefore, 10% and 5%. This is not, however, equivalent to 15%.

Example: Compute for the discount and the net invoice price if an item listed at P1, 250.00 is given a 10% and
5% discount.
Given: List Price =P1, 250.00
Discount Rates = 10% and 5 %
Find: a. Discount P1, 250.00*10% = P125.00 ; =P1, 250.00-125.00 = P1, 125.00
P1, 125.00*5% = P 56.25 ; =P1, 125.00- 56.25 = P1, 068.75
b. Invoice Price
P1, 250.00 – 181.25 = 1, 068.75
 Cash discount -- also called settlement discount, this is an additional discount to the
invoice price aside from the trade discount which is given to the buyer for early payment.
Unlike trade discounts, this is recorded in the accounting records either as sales discounts
in the books of the seller or purchases discounts in the books of the buyer. Sellers often
refer to cash discounts as sales discount, while buyers often refer to them as purchase
discounts.
c. What are the terms related to discounting?
a. Credit – is the ability of a buyer to acquire products ahead of payment, which will be made
in the future.
b. Credit Term – is the standard or negotiating term agreed upon by the seller and the buyer
that dictate the following:
i. Monthly and total amount to be paid.
ii. Maximum time allowed for repayment.
iii. Discount for cash or early payment.
iv. Amount or rate of penalty for late payment.
c. Reckoning date or Invoice date – it is the estimated date of payment, or it is the due date
for payment. This is found on the invoice or bill.
d. Invoice or bill – the document issued by the seller to the buyer which specifies the
products, quantities, and agreed prices, as well as payment terms.
e. ROG or Receipt of Goods – it means that the discount period starts from the time the
buyer receives the products and not the time he or she bought them.
f. Discount period – is the period of time granted by the seller to the buyer to settle the
latter’s account for him to be entitled to a cash discount. Only those buyers who pay
within the discount period shall entitle for any cash discount.
i. In calculating discount days, the first day is excluded while the last day is
included.
Example:
Assume a ten-day discount period. The buyer bought merchandise on account on January 2. Subsequently, the
buyer paid his account on January 10. Was the buyer able to avail the discount?
Yes, since it is still within the discount period. From January 2 to January 10 is only eight (8) days.
But if the buyer paid his account only on the 13th of January, the buyer can no longer avail of the discount
because he only paid his account on the 11th day, that is beyond the ten-day discount period.
d. What are the types of Cash Discount terms?
a. Net 10 or n/10 -- The buyer has to pay within 10 days.
b. Net 30 or n/30 -- Net or simply n means the credit period of the purchase. A net 30 or n/30 means
that the entire invoice is due within 30 days from the invoice without discount.
c. 1/15, n/30or 1/15 net 30 -- this means that the invoice is due within 30 days but the buyer is
entitled to 1% discount if the invoice is paid within 15 days from invoice date, there will be no
discount on the 16th to 30th day.
Example:
Royce store purchased goods with a list price of ₱100,000.00 and a 30% trade discount from a supplier. The
supplier billed the balance 2/10, n/30.
The amount due to the supplier shall be computed as follows:
List price ₱100,000.00
Less: Trade discount (30% X ₱100,000.00) 30,000.00
Invoice price (Cash due if payment is beyond discount period) ₱ 70,000.00
Less: Cash discount (2% X ₱70,000.00) 1,400.00
Cash due (If within the discount period) ₱ 68,600.00
 d. 2/EOM, n/60 -- this means that the invoice is due for payment in 60 days but the buyer shall be
entitled to 2% cash discount if payment is made on or before the end of the month of purchase. If
payment is not made within the discount period, the entire invoice price is due 60 days from the
invoice date.
e. 2/10 EOM, n/60-- this means that the invoice is due for payment in 60 days but the buyer is entitled to
2% discount if he pays on or before the tenth day of the month following the month of purchase. If
payment is not made within the discount period, the entire invoice price is due 60 days from the
invoice date.
Example:
On January 25, 2017, Royce Store purchased goods with a list price of ₱250,000.00 with terms of 2/10, EOM, n/60
from Supplier JDC. On February 01, 2017, merchandise with an invoice price of ₱5,000.00 was returned by Royce.
On February 10, 2017, Royce Store paid its account.

The net amount due the supplier shall be computed as follows:

List Price ₱ 250,000.00
Less: Trade Discount 0.00
Invoice Price of merchandise ₱ 250,000.00
Less: Invoice price of merchandise returned 5,000.00
Net invoice price ₱ 245,000.00
Less: Cash discount (*2% X ₱245,000.00) 4,900.00
Cash due on February 10, 2017 ₱ 240,100.00

*since the term is end of the month (EOM), the discount period will start from February 1 up to February 10, 2017.
Since Royce paid its account on February 10, 2017, it is qualified to the 2% discount.

e. Are there any special cases under the merchandising business?

a. Yes, these are the following:
i. Shipping terms
ii. Freight terms
f. What is all about shipment of goods?
a. The act of transporting or delivering ordered goods from the supplier to the buyer.
g. What are the kinds of shipping terms?
a. FOB Shipping Point -- ownership to the goods transfer to the buyer from the moment the
goods leave the warehouse of the seller which is normally the shipping date or invoice date. Under
this term, sales shall be recorded from the moment the goods are delivered. The buyer already owns
the goods in transit; hence, the buyer shall be responsible for the freight.
-- is a contraction of the term "Free on Board Shipping
Point." The term means that the buyer takes delivery of goods being shipped to it by a
supplier once the goods leave the supplier's shipping dock.
-- If the goods are damaged in transit, the buyer should file a
claim with the insurance carrier, since the buyer has title to the goods during the period
when the goods were damaged.
b. FOB Destination -- ownership of the goods transfer to the buyer from the moment the
goods arrive at the warehouse of the buyer which is usually the delivery receipt date. Under this term
sales shall be recorded the moment the client acknowledges delivery. The seller still owns the goods
in transit; hence, the seller shall be responsible for freight.
-- is a contraction of the term "Free on Board Destination."
The term means that the buyer takes delivery of goods being shipped to it by a supplier
once the goods arrive at the buyer's receiving dock.
-- If the goods are damaged in transit, the seller should file a
claim with the insurance carrier, since the seller has title to the goods during the period
when the goods were damaged.

h. What does FOB mean?

a. FOB accounting deals with the treatment of freight charges and how they are recorded in the
accounting system.
 b. FOB means Free on Board and is an abbreviated term used in shipping. It is important to understand
the nature of the term accounting FOB, as it will affect how the freight charges are posted to the
accounting records.
c. Free on board (FOB) is a trade term that indicates whether the seller or the buyer has liability for
goods that are damaged or destroyed during shipment between the two parties.
i. What are the freight terms?
a. Freight is a charge paid for carriage or transportation of goods by air, land, or sea.
b. Freight Prepaid -- the freight shall be paid by the seller to the freight or cargo forwarder upon
release of the goods in his premises. A freight charge that is paid at the port of origin or loading, and
are billed to the seller in the buyer's invoice. It is not refundable even if the shipment fails to arrive at
its destination. Freight prepaid, where air or ocean freight, as the case maybe, is to be borne by the
booking party at origin.
c. Freight Collect -- the freight is paid by the buyer to the freight or cargo forwarder upon
arrival of the delivery in his premises. Freight collect means that the air or ocean freight, as the case
maybe, would be collected by carrier at destination.
j. How to recognize purchases and sales involving shipping and freight terms?
Date of recognition of Date of recognition of
If the term is:
purchases sales
When the buyer when the buyer
FOB Destination
receives the goods receives the goods
At the point of At the point of
FOB Shipping Point
shipment shipment

k. How to compute for the Net Cash Collection or Payment with freight and shipping terms?
a. List Price ₱ XX
b. Less: Trade Discount XX
c. Returned Goods XX
d. Invoice Price of merchandise sold or purchased ₱ XX
e. Less: Invoice Price of merchandise returned XX
f. Net invoice price ₱ XX
g. Less: Sales or Purchase Discount (% X NIP if within the CP) XX
h. Total collection or payment before freight* ₱ XX
i. Less: Freight paid by the buyer – (FOB Destination, Freight Collect) XX
j. Add: Freight paid by the seller – (FOB Shipping Point, Freight Prepaid) XX
k. Total Cash Collection or Payment after freight** ₱ XX

*This would be the total collection if the terms are FOB Destination, Freight prepaid and FOB
Shipping Point, Freight collect
**This would be the total collection if the terms are FOB Destination, Freight collect and FOB
Shipping Point, Freight prepaid.

B. Evaluation (Exercise)
Computation of Invoice Price and Net Cash Payment
 Invoice price of
List price of merchandise Trade Cash Discount Date of Date of
Suppliers
subsequently Purchase Payment
Merchandise purchased Returned Discount and due date
Franklin Co. ₱400,000.00 20,000.00 10% 2/10, n/30 2/7/2017 2/16/2017
Danny Co. 600,000.00 30,000.00 10% 3/10, 1/15, n/60 2/8/2017 2/23/2017
Stevan Co. 800,000.00 40,000.00 15% 1/10, n/30 2/9/2017 3/6/2017
Priscila Co. 500,000.00 10,000.00 0% 2/10, EOM, n/30 2/28/2017 3/10/2017

Required:
1. Determine the invoice price of merchandise purchased.
2. Determine the net cash payment.

I. Integration
A. Synthesis
1. Ask students the following questions randomly:
1. What is discount?
2. What are the two types of discounts?
3. What is trade discount?
4. What are the other terms for trade discount?
5. What is cash discount?
6. Differentiate trade discount from cash discount.
7. What are the terms under the cash discount?
8. What does n/30 mean?
9. What does 1/10, n/30 mean?
10. What does 1/10, EOM, n/30 mean?
11. What is shipment?
12. What are the two kinds of shipping terms?
13. What is FOB?
14. What is FOB Destination?
15. What is FOB Shipping Point?
16. Differentiate the two types of shipping terms.
17. What is Freight?
18. What is Freight Prepaid?
19. What is Freight Collect?
20. How does Freight Collect differ from Freight Prepaid?

B. Something to ponder
1. What is the significance of knowing how to compute discounts?
2. How helpful are the topics to you in buying merchandise?
3. What will happen if a business doesn’t give discounts to its customers?
4. How can discounts affect the customers’ buying behavior and business’ selling activities?
5.How helpful does the shipping and freight terms to you as a student? And someday as a
business owner?