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Unearned Discounts; Unearned Cash Discounts; Cash Discounts
From time to time, customers take unearned discounts. An unearned discount involves payments made beyond the prescribed discount period. Administration of discount terms can become a major problem in customer relationships. If cash discounts are to serve their purpose, the seller must not allow unearned discounts. Strict administration of discount terms may cause customers to claim they are being penalized if there is no allowance for mail time, transportation time, and other delays. Correspondence between seller and buyer over these matters is costly and often impairs good sales relationships. Enforcement of discount terms varies widely, but most firms allow few days grace period beyond the discount period. Beyond that, the discount will be charged back.
On occasion, a customer that used to take cash discounts stops doing so. The two most likely causes are:
- cash flow problems, or
- a change in personnel or workflow in the debtor’s accounts payable department
A change in payment pattern requires clarification. It may indicate a short-term problem, or be the first indication of a serious financial crisis. A phone call or a letter to the customer asking about the change in payments is not out-of-line provided the creditor is asking a question rather than making an accusationabout the debtor’s financial health.
Edited by Michael C. Dennis