Which of the following best describes the 2/10, net 30 payment terms commonly used in construction accounts payable?
Correct Answer
C) 2% discount if paid within 10 days, full payment due in 30 days
The term 2/10, net 30 means the buyer can take a 2% discount if payment is made within 10 days, otherwise the full amount is due within 30 days. This is a common cash flow incentive for early payment.
Why This Is the Correct Answer
Option A correctly interprets the standard trade credit notation '2/10, net 30'. The '2/10' portion means a 2% discount is available if payment is made within 10 days of the invoice date. The 'net 30' portion means the full invoice amount (without discount) is due within 30 days. This is a common cash flow management tool used by suppliers to encourage early payment from contractors and subcontractors.
Why the Other Options Are Wrong
Option A: Payment of 2% due in 10 days, remaining 98% due in 30 days
This option describes a completely different payment arrangement involving installment payments over multiple periods. The 2/10, net 30 terms have nothing to do with down payments or extended payment schedules - they refer to discount opportunities and standard payment deadlines.
Option D: 2% penalty if not paid within 10 days, 30% penalty after 30 days
This option incorrectly interprets the terms as penalties rather than discounts. The 2/10, net 30 format is about offering incentives for early payment, not imposing penalties. Additionally, a 30% penalty would be extremely excessive and likely illegal in most jurisdictions.
Memory Technique
Think '2/10, net 30' as 'Two percent off if I pay in TEN days, otherwise NET full amount in THIRTY days' - the numbers tell the story in order: discount%, discount days, full payment days.
Reference Hint
Business and Finance for Contractors chapter on Accounts Payable and Cash Flow Management, or Accounting Principles section covering trade credit terms
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