Acca financial Accounting (FA) Study Text ac ca (FA)

Accounting for settlement discounts 

An entity may receive a discount from its suppliers – known as 

Discount 

received. 

This is normally netted off against the purchases expense to reduce 

cost of sales. 

An entity may give its customers a discount – known as 

Discount allowed

. 

This is a reduction in revenue. 

A settlement discount is different in nature to a trade discount. A trade discount 

is a definite reduction in price that is given to the customer. A settlement 

discount is a reduction in the overall invoice price that is offered to the 

customer. It is for the customer to decide whether to accept this discount and 

pay the reduced amount paid within the required timescale, or whether to pay 

the full invoice amount at some later date. 

In practical terms, if a settlement discount is offered to a credit customer, there 

is no way of knowing at the point when the sales invoice is prepared, whether 

the customer will take advantage of the discount terms offered and pay the 

reduced amount. This is known as ‘variable consideration’ as the seller does not 

know at the time sales revenue is recorded whether the business will receive 

only the discounted amount or the full amount. 

Variable consideration is dealt with as part of the 5-step approach to revenue 

recognition in chapter 17 'Preparing basic financial statements'. 

 

 

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