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ACCA Applied Knowledge · Financial Accounting · Sales and purchases

Perrin Ltd sells goods on credit for $5,000 (no sales tax) and offers a 4% discount if the customer pays within 14 days. The customer pays within 10 days and takes the discount. Which entry correctly records the receipt?

Debit Bank $4,800 and Discount allowed $200, and credit Receivables $5,000. The customer pays 96% of the invoice, but the whole receivable is cleared, so the $200 settlement discount is recorded as an expense called discount allowed.

  1. ADebit Bank $5,000, credit Receivables $5,000
  2. BDebit Bank $4,800, debit Discount allowed $200, credit Receivables $5,000Correct
  3. CDebit Bank $4,800, credit Receivables $4,800
  4. DDebit Bank $5,200, credit Receivables $5,000, credit Discount received $200

Explanation

Cash received is 5,000 x 96% = $4,800. The receivable of $5,000 must be cleared fully, so the $200 difference is debited to discount allowed, an expense. Option C leaves $200 outstanding in receivables.

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