Financial Accounting · Receivables and payables

Discounts and Contra Entries in Financial Accounting

Updated 11 October 2026 · Fact-checked

A trade discount is a price reduction taken off the invoice and never recorded in the ledger. A settlement discount is a reduction for early payment, recorded as discount allowed (expense) or discount received (income). A contra entry offsets a balance in the receivables ledger against the payables ledger for the same party.

Understand Discounts and Contra Entries

A trade discount is a reduction in the list price given to a customer, often for buying in bulk or for being a trade customer. It is deducted on the invoice. You record sales or purchases at the net amount. No separate discount account is used.

A settlement discount (also called a cash discount or prompt payment discount) is offered if the customer pays within a set period. It is not deducted in arriving at the invoice amount. In ACCA FA, the standard treatment is to record the sale or purchase at the invoice amount first. If the customer pays early and takes the discount, you record it as discount allowed or discount received when the cash is received or paid. This is the treatment ACCA expects in the exam. If a question states a different method, follow the method it states.

Discount allowed is what you give to your customers. It is an expense in the statement of profit or loss. The customer pays less, so you must still clear the full receivable: debit bank with cash received, debit discount allowed with the discount, credit receivables with the full amount.

Discount received is what your suppliers give you. It is income. Debit payables with the full amount, credit bank with cash paid, credit discount received with the discount.

A contra entry applies when the same party is both your customer and your supplier. Instead of each side paying the other, you net the balances. Debit payables ledger control (or the supplier account) and credit receivables ledger control (or the customer account) for the lower of the two balances. No cash moves. The net difference is then settled in cash.

Key formulas to remember

Trade discount: Net invoice amount = List price − Trade discount; Record the net amount. No discount account entry.
Settlement discount taken by customer (seller's books): Dr Bank (cash received); Dr Discount allowed (discount); Cr Receivables (full invoice); Discount allowed is an expense.
Settlement discount taken from supplier (buyer's books): Dr Payables (full invoice); Cr Bank (cash paid); Cr Discount received (discount); Discount received is income.
Contra entry: Dr Payables ledger; Cr Receivables ledger (lower of the two balances); No cash moves. Only the net difference is paid or received.
Sales tax and settlement discount: Sales tax = Price after trade discount and after settlement discount × sales tax rate. Where a settlement discount is offered, calculate sales tax on the discounted price, whether or not the customer takes the discount.; This applies unless the question states otherwise. Any other discount-related adjustment follows the question wording.

How to solve Discounts and Contra Entries questions

Use this method for any discount or contra question, whether it asks for a ledger entry, a journal or a balance.

1Read the wording to decide whether the discount is trade or settlement. Trade is on the invoice. Settlement depends on early payment.
2If trade, deduct it from list price and use the net figure. Stop there for the discount.
3If settlement, work out whether the customer or you took it. Check the payment date against the discount period.
4Calculate the discount as a percentage of the amount the discount applies to, usually the invoice total. Check whether sales tax is included.
5Decide the side: you are the seller means discount allowed (expense); you are the buyer means discount received (income).
6Write the entry so the full invoice clears the receivable or payable and cash equals the invoice less the discount.
7For contras, identify the party in both ledgers. Contra the lower balance, debit payables, credit receivables.
8Check the final balances. Debits must equal credits and the control account balances must make sense.

Quickest way: Three-line check for discount entries

When to use it: Use in the objective test when you must pick or enter an amount quickly.

Calculate cash actually paid: invoice × (1 − discount %).
Discount = invoice − cash paid.
Seller: discount allowed is a debit. Buyer: discount received is a credit. For a contra, take the smaller balance and move it between the control accounts.

Common mistakes in Discounts and Contra Entries

Recording a trade discount in a discount allowed or discount received account.
The word discount makes students assume an expense or income account is needed.
Fix: Trade discounts never appear in the ledger. Record only the net amount.
Putting discount allowed on the credit side or treating it as income.
Students see the receivable being credited in the settlement entry and wrongly credit the discount too.
Fix: Discount allowed is a debit expense. Discount received is a credit income.
Reducing the receivable or payable by the cash only, leaving the discount balance outstanding.
Students forget the discount also settles part of the debt.
Fix: Credit receivables or debit payables by the full invoice amount.
Contra-ing the wrong amount, such as the higher balance or the sum of both.
Students offset the whole of one balance without checking the other.
Fix: The contra equals the lower of the two balances.
Debiting receivables and crediting payables in a contra.
Students copy the usual direction of the ledgers.
Fix: Receivables balance is a debit, so credit it. Payables balance is a credit, so debit it.
Applying the settlement discount percentage to the net-of-tax amount or to the wrong base.
Questions differ and students use one rule for all.
Fix: Use the base the question states. Where a settlement discount is offered, sales tax is calculated on the discounted price, whether or not the customer takes the discount, unless the question says otherwise. Any other discount-related adjustment follows the question wording.

Worked examples

Example 1

Alpha sells goods with a list price of $20,000 to Beta. A 10% trade discount applies. Alpha offers a 2% settlement discount for payment within 14 days. Beta pays within 10 days. Ignore sales tax. Record Alpha's entries.

Show the solution

Trade discount: $20,000 × 10% = $2,000. Net invoice = $18,000.
Record the sale: Dr Receivables $18,000; Cr Sales $18,000.
Settlement discount: $18,000 × 2% = $360.
Cash received = $18,000 − $360 = $17,640.
Dr Bank $17,640; Dr Discount allowed $360; Cr Receivables $18,000.

Answer: Sales $18,000; discount allowed $360 (expense); bank receipt $17,640; receivable cleared in full.

Example 2

At the year end, Gamma Ltd has a balance of $5,200 in the receivables ledger for Delta and a balance of $3,800 in the payables ledger for Delta. A contra is agreed. Give the entry and state what Delta then owes or is owed.

Show the solution

The contra is the lower balance: $3,800.
Debit payables ledger control $3,800 (reduces the liability to Delta).
Credit receivables ledger control $3,800 (reduces the amount Delta owes).
Receivable left: $5,200 − $3,800 = $1,400. Payable left: $0.

Answer: Dr Payables $3,800; Cr Receivables $3,800. Delta now owes Gamma $1,400.

Exam tips

Read for the word settlement or prompt payment. If the discount is conditional on payment, it is a settlement discount.
Work out whether the question asks for cash received or the discount itself. Many wrong options give the other figure.
In multiple response questions, check each statement. A common false one is that trade discounts are recorded in the ledger.
For a contra, quickly compare both balances and use the smaller one. Wrong options often use the larger one.
In Section B ledger tasks, show the discount line separately so the control account balances.

Practice questions from Receivables and payables

Discounts and Contra Entries: frequently asked questions

What is the difference between trade discount and settlement discount?

A trade discount is deducted from the list price on the invoice and is not recorded in the ledgers. A settlement discount is offered for early payment and is recorded as discount allowed or discount received when payment is made.

Is discount allowed an expense or income?

Discount allowed is an expense because you give up revenue by accepting less cash. Discount received is income because you pay a supplier less than the invoice.

How do I record a contra entry between sales and purchase ledgers?

Take the lower of the two balances for the same party. Debit the payables ledger and credit the receivables ledger for that amount. No cash moves, and only the net difference is later settled.

Does a settlement discount affect sales tax?

Yes. Where a settlement discount is offered, sales tax is calculated on the discounted price, whether or not the customer takes the discount. This applies unless the question states otherwise, and any other discount-related adjustment follows the question wording.