Learning Outcomes
After reading this article, you will be able to identify settlement discounts offered by suppliers, correctly record discounts received when paying supplier invoices, and understand the double-entry bookkeeping for such discounts. You will also know how discounts affect the cash payments record and supplier account balances—key skills for the ACCA FA1 exam.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand how discounts received from suppliers affect business payments and accounting records. In this article, you should focus on:
- The distinction between trade and settlement (prompt payment) discounts received from suppliers
- How to record supplier invoice payments that include discounts received
- The double-entry bookkeeping required for discounts received
- The effect of discounts received on the cash payments record and payables (supplier) ledger
- Checking discount entitlement against supporting documentation
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- A business receives a purchase invoice for $1,000, offering a 2% settlement discount if paid within 10 days. The business pays within the discount period. What is the double entry for this payment?
- When recording a payment to a supplier taking advantage of a settlement discount, which account is credited for the discount received?
- True or false? Trade discounts are recorded in the accounting system as a separate entry for each invoice.
- Briefly explain the difference between a trade discount and a settlement discount.
Introduction
Businesses often obtain goods and services on credit from suppliers, with the agreement that payment will be made later. Suppliers may encourage prompt payment by offering settlement discounts—reductions in the amount payable if the invoice is settled within a specified period. For accurate bookkeeping, it is essential to correctly record these discounts received and reflect the net payment in both the cash payments record and payables account. This article covers how to account for discounts received when paying supplier invoices and explains the relevant double-entry.
Key Term: settlement discount
A reduction in the amount payable to a supplier if payment is made within a specified period, also called a prompt payment discount.Key Term: discount received
Income recognised by a business when it pays less than the full invoice amount to a supplier due to a settlement discount.
The Difference Between Trade and Settlement Discounts
Suppliers may offer two types of discounts:
-
Trade discounts, which are deductions from the list price given before the invoice is raised (e.g., for buying in bulk or being a regular customer). Trade discounts are not recorded separately in the accounting records—the supplier simply invoices the buyer for the net amount after the trade discount.
-
Settlement discounts, offered as an incentive for early payment. These are recorded in the accounting records only when the discount is actually taken, i.e., when the invoice is settled within the specified discount period.
Key Term: trade discount
A reduction from the list price of goods or services, shown on the invoice and not recorded separately in the accounting records.
Recording Discounts Received on Supplier Payments
When a business pays a supplier within the settlement discount period, the amount paid will be less than the full invoice value. The difference (the discount received) must be accounted for as income for the business.
Step 1: Checking Entitlement
Before recording payment and discount, always confirm that:
- The payment is made within the discount period stated on the invoice
- The payment amount matches the terms
Step 2: Accounting Entries
The double-entry to record the payment taking advantage of a settlement discount is:
- Debit trade payables (the full invoice amount, including sales tax if applicable)
- Credit cash/bank (the reduced payment made)
- Credit discount received (the amount of the discount income)
Step 3: Entering in Cash Payments Record
- The full amount of the payment should be entered in the "Total" and "Payables" columns of the cash payments record.
- The "Discount received" column records the amount of the discount received.
Worked Example 1.1
A business receives a supplier’s invoice for $800. Payment terms are 2% settlement discount if paid within 7 days. The business pays $784 ($800 less 2%) by bank transfer on the 5th day after the invoice.
What are the correct journal entries to record this?
Answer:
- Debit Payables (Supplier) $800
- Credit Bank $784
- Credit Discount Received $16
The payment reduces the bank balance by $784; the payables account is cleared in full; the $16 discount is income.
Worked Example 1.2
A supplier invoice totals $1,500. The supplier allows a 3% settlement discount if paid within 14 days. The business misses the discount period and pays $1,500 after 18 days.
How is this payment recorded?
Answer:
- Debit Payables $1,500
- Credit Bank $1,500
No discount entry is made because the payment was made after the settlement discount period.
Exam Warning
Settlement discounts are recorded only if taken—do not record the discount received unless payment was made within the specified period. Always check supporting documentation for discount terms and payment dates.
Discount Received in the Cash Payments Record
The cash payments record (book) typically contains columns for:
- Date
- Payee/Supplier Account Number
- Total Payment
- Payables
- Discount Received
The amount shown in the "Discount Received" column should match the credit entry posted to the discount received account in the general ledger.
Posting to the General Ledger
When posting from the cash payments record:
- Debit Payables with the full amount (invoice value)
- Credit Bank with the payment actually made
- Credit Discount Received with the settlement discount amount
Worked Example 1.3
On 15 June, a business pays a supplier $980 in settlement of a $1,000 invoice (2% discount offered for payment within 10 days, which the business takes).
Record the entries in the payables, bank, and discount received accounts.
Answer:
- Payables: Debit $1,000 (clearing the debt in full)
- Bank: Credit $980 (actual payment made)
- Discount Received: Credit $20
Summary
Settlement (prompt payment) discounts are a form of income received for paying supplier invoices early. They are recorded as a credit to the "discount received" account, with the net payment reducing the bank balance. Trade discounts are not recorded separately in the accounting system. Always check payment timing and discount terms before making entries.
Key Point Checklist
This article has covered the following key knowledge points:
- Distinguish trade discounts from settlement discounts received
- Record supplier payments that include settlement discounts
- Complete double-entry bookkeeping for discounts received
- Enter discounts received correctly in the cash payments record and general ledger
- Ensure compliance with supplier payment terms for discount eligibility
Key Terms and Concepts
- settlement discount
- discount received
- trade discount