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Forums › ACCA Forums › ACCA FM Financial Management Forums › Chpt 5 The mgt of receivables – Simple settlement discount

- This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

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- August 1, 2021 at 6:33 pm #630067
Dear John, one example you have given in the video:-

A customer currently takes 25 days to pay. We then offer a discount of 1 % for payment within 10 daysFor every hundred we invoice, we would receive a hundred within 25 days, with the discount we will get it in 10 days. And because of the 1% discount we can only get 99 dollars. So for every 99 we get earlier, we are losing a dollar. The interest is therefore 1/99 = 0.010101 or 1.0101% over 15 days.

Up to this point, I don’t understand why the interest is calculated by 1/99. I think it is a mathematics problem. Is there any explanation to this?

Thank you!

August 1, 2021 at 7:40 pm #630073It is because for every $99 they will lose $1.

If you were to invest $99 and receive $1 then what rate of interest would you think you were getting? $1 for every $99 is like getting interest of 1/99 or 1.01%

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