Abstract
Abstract Conceptually, cash discounts offered but not taken represent interest expense to the buyer and interest revenue to the seller. This paper identifies inconsistencies among seven intermediate accounting textbooks regarding how to express the cost of cash discounts as an effective annual rate. A correct formula for computing the effective annual rate on cash discounts is derived and compared with textbook formulas. Appendix A generalizes the correct formula to noninterest-bearing notes and notes receivable discounted at a bank.
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