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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Cycle

Anita Traders paid Rs 49,000 to a creditor, Vimal, in full settlement of his account of Rs 50,000. Which journal entry is correct?

Debit Vimal Rs 50,000, credit Cash Rs 49,000 and credit Discount Received Rs 1,000. The creditor's full balance is cleared, and the saving on settlement is an income of the business, recorded as discount received.

  1. AVimal A/c Dr 50,000 to Cash A/c 49,000 and Discount Received A/c 1,000Correct
  2. BVimal A/c Dr 49,000 and Discount Allowed A/c Dr 1,000 to Cash A/c 50,000
  3. CVimal A/c Dr 50,000 to Cash A/c 49,000 and Discount Allowed A/c 1,000
  4. DCash A/c Dr 49,000 and Discount Received A/c Dr 1,000 to Vimal A/c 50,000

Explanation

The creditor's account is cleared by debiting Rs 50,000. Cash going out is credited Rs 49,000, and the Rs 1,000 saved is a gain, so Discount Received (nominal, income) is credited. Discount Allowed applies to discount given to debtors, so option 3 is wrong.

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