ACCA Applied Knowledge · Financial Accounting · Receivables and payables
A company offers a settlement discount of 2% to customers who pay within 10 days. A customer owing $5,000 (before discount) pays within the period and takes the discount. Under the usual bookkeeping treatment, what is the double entry to record the discount allowed?
Debit Discount allowed $100 and credit Receivables $100. The discount is an expense to the seller, and the customer's balance must be cleared by the amount of discount even though no cash is received for it.
- ADebit Discount allowed $100; credit Receivables $100Correct
- BDebit Receivables $100; credit Discount allowed $100
- CDebit Discount received $100; credit Payables $100
- DDebit Discount allowed $100; credit Cash $100
Explanation
Discount allowed is an expense to the seller: 2% x $5,000 = $100. The receivable is reduced by the discount, so debit Discount allowed and credit Receivables. Reversing the entries (option 2) would increase the receivable instead of clearing it.
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