ACCA Applied Knowledge · Financial Accounting · Receivables and payables
Kestrel Ltd sold goods on credit to a customer for $4,000 and offered a 5% settlement discount for payment within 10 days. The customer paid within the period. Kestrel records discounts allowed as an expense when the customer pays. What is the cash received and how is the discount recorded?
Cash received is $3,800 because the 5% discount of $200 is deducted. The seller debits discounts allowed, an expense, by $200, debits bank $3,800, and credits receivables with the full $4,000 to clear the customer's balance.
- ACash $3,800; debit discounts allowed $200Correct
- BCash $3,800; credit discounts allowed $200
- CCash $4,000; debit discounts allowed $200
- DCash $4,200; credit discounts received $200
Explanation
Discount is 5% x $4,000 = $200, so cash received is $3,800. The discount is an expense for the seller, so it is debited to discounts allowed while receivables are credited with the full $4,000. Crediting the discount, as in option B, reverses the entry.
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