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CMA Foundation · Fundamentals of Financial and Cost Accounting · Journal and Ledger

Ravi Traders owed Kiran Rs 20,000. Kiran agreed to accept Rs 19,200 in full settlement and Ravi paid by cheque. Later, Ravi also recorded Rs 5,000 of goods returned to Kiran, but this was after the settlement was made and is unrelated to it. Which journal entry correctly records the settlement in Ravi's books?

Debit Kiran A/c Rs 20,000, credit Bank A/c Rs 19,200 and credit Discount Received A/c Rs 800. The full liability is cleared, the cheque shows cash paid, and the Rs 800 saved from a creditor is a gain called discount received, not discount allowed.

  1. AKiran A/c Dr 20,000 to Bank A/c 19,200 and Discount Received A/c 800Correct
  2. BKiran A/c Dr 19,200 to Bank A/c 19,200
  3. CKiran A/c Dr 20,000 to Bank A/c 19,200 and Discount Allowed A/c 800
  4. DKiran A/c Dr 19,200 and Discount Received A/c 800 to Bank A/c 20,000

Explanation

Kiran's account must be cleared at 20,000 by debiting it. Bank is credited with 19,200 paid, and the 800 saved is a gain, credited to Discount Received A/c. Option C wrongly uses Discount Allowed, which applies to discount given to customers. Option B leaves Kiran's account showing 800 owed. The goods return is a separate entry.

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