Unearned Discounts

Once discount terms are established, customers may try to take unearned discounts by deducting them from 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 because they can be an important influence on seller's costs, and therefore on profits. 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 only a few days grace beyond the discount period and do not allow unearned discounts. Most companies charge-back unearned discounts, although some actually return the customer's un-cashed check as not acceptable.