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2.2.2 Cash/settlement discounts received 

When a business is given the opportunity to take advantage of a cash discount or a settlement discount 

for prompt payment, the decision whether or not to take the discount is a matter of financing policy, not 

of trading policy. 

For example, A buys goods from B, on the understanding that A will be allowed a period of credit before 

having to pay for the goods. The terms of the transaction are as follows. 

(a) 

Date of sale: 1 July 20X6 

(b) 

Credit period allowed: 30 days 

(c) 

Invoice price of the goods: $2,000  

(d) 

Settlement discount offered: 4% discount for prompt payment 

A has the following choices. 

(a) 

Holding on to its money for 30 days and then paying the full $2,000 

(b) 

Paying $2,000 less 4% – ie $1,920 now 

This is a financing decision about whether it is worthwhile for A to save $80 by paying its debts sooner, or 

whether it can employ its cash more usefully for 30 days, and pay the debt at the latest acceptable 

moment. 

If A decides to take the settlement discount, it will pay $1,920, instead of the invoiced amount of 

$2,000. The settlement discount received ($80) will be accounted for in the books of A as follows. 

(a) 

In the purchases account, the cost of purchases will be at the invoiced price (or 'full trade' price) 

of $2,000. When the invoice for $2,000 is received by A, it will be recorded in A's books of 

account at that price, and the subsequent financing decision about accepting the settlement 

discount is ignored. 

(b) 

In the statement of profit or loss, the settlement discount received is deducted from cost of sales.