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

Illustration 1 – Settlement discount – seller perspective 

 

An entity sold goods to a customer on credit at a price of $200, and the 

customer was offered 3% settlement discount for settlement within ten 

days of the invoice date. 

How should this be accounted for in the books of the seller if: 

(a)  the customer was not expected to take advantage of the early 

settlement discount terms offered? 

(b)  the customer was expected to take advantage of the early 

settlement discount terms offered? 

 

 

 

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Returns, discounts and sales tax 

76

 

KAPLAN PUBLISHING

 

 

Solution to Illustration 1 

 

(a)  The customer was not expected to take advantage of the early 

settlement discount 

The invoice would consist of the following amounts: 

 $ 

List price 

200 

Less: 3% settlement discount 

Nil 

 –––– 

Amount due from customer 

200 

 –––– 

If, as expected, the customer did not take advantage of the 

settlement discount available, the full amount of $200 should be 

paid by the customer. Upon receipt of the amount due, this would 

be recorded as follows: 

 $ 

Debit: Cash 

200 

Credit: Receivables 

200 

 

If, however, the customer did take advantage of the settlement 

discount terms, they would pay $194. The receivable of $200 

must be cleared, even though only $194 has been received in full 

settlement. This would be recorded as follows: 

 $ 

 

Debit: Cash (97% of $200.00) 

194 

Debit: Revenue 

6 

Credit: Receivables 

200 

(b)  The customer was expected to take advantage of the early 

settlement discount 

The invoice would consist of the following amounts: 

 $ 

 

List price 

200 

Less: 3% settlement discount 

(6) 

 ––– 

Amount due from customer 

194 

 ––– 

 

 

 

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