## **Learning Outcomes**

After studying this article, you will be able to identify how businesses record receipts, distinguish between types of discounts, explain the treatment of bad debts, and perform double-entry accounting for irrecoverable debts write-off. You will also recognize common pitfalls related to recording receipts and managing doubtful debts for the ACCA FA1 exam.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you are required to understand key concepts related to business income and credit management for exam success. This article covers:

- The recording of receipts, especially from credit customers
- Different types of discounts: trade and settlement (early payment)
- The process for recognizing and writing off irrecoverable (bad) debts
- The impact of bad debts and discounts on ledger accounts and financial reports
- Double-entry procedures for debts written off as irrecoverable

## **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._

1. When a business accepts that an amount owed by a customer cannot be collected and writes it off, what is the correct double entry?
2. What is the main difference between a trade discount and a settlement discount?
3. What is the effect on the profit of writing off an irrecoverable debt?
4. A business offered a settlement discount of 3% for early payment. If a customer takes this discount, how should the discount be reflected in the accounting records?

## **Introduction**

Receipts represent the money a business receives, often from customers paying for goods or services. In most businesses, many sales are made on credit, and it is common for some customers to delay payment, claim discounts, or occasionally fail to pay at all. Accurate recording of all receipts, the calculation and treatment of discounts, and correct handling of bad debts are key bookkeeping skills required for the ACCA exam. This article explains how receipts are documented, circumstances when discounts are given, and how to account for those debts that can no longer be expected to be paid.

> **Key Term: receipt**
> Any money received by a business, whether in cash, by cheque, or through electronic means.

## **RECEIPTS AND RECORDING CUSTOMER PAYMENTS**

Most businesses issue invoices when goods or services are sold on credit. When customers pay their invoices, these receipts must be matched to the relevant customer account and the amount owing reduced or cleared. Receipts might be banked as cash, paid via card, or received by digital payment, but all receipts must be accurately recorded and referenced to the original debt.

> **Key Term: remittance advice**
> A document sent with a payment by a customer, stating what invoice(s) the payment relates to.

## **TYPES OF DISCOUNTS**

Businesses often use discounts to encourage sales or reward early payment. ACCA FA1 distinguishes two main types:

- **Trade discount** – a reduction on the list price, usually given for bulk purchases or to regular customers. Trade discounts are shown on the invoice and deducted before any tax is calculated.
- **Settlement (early payment) discount** – an extra deduction offered if the customer pays quickly, for example, "2% discount if paid within 10 days."

> **Key Term: trade discount**
> A reduction in the list price of goods or services, normally shown directly on the sales invoice.
>
> **Key Term: settlement discount**
> A discount given for prompt payment, often deducted from the invoice total if paid within a specified period.

### **Worked Example 1.1**

A supplier sells goods costing \$500 to a customer and allows a trade discount of 10%. The supplier also offers a settlement discount of 2% for payment within 14 days. The customer pays after 15 days.

**Question:** What amount does the customer pay, and what is the correct entry in the sales ledger?

> **Answer:**
>
> Trade discount: \$500 × 10% = \$50. Invoice total after trade discount = \$500 – \$50 = \$450.
> The customer did **not** pay early, so no settlement discount applies. Amount paid is \$450. Sales are recorded at \$450; any settlement discount is only recognized if actually taken.

### **Recording Discounts in the Accounts**

- **Trade discounts** are deducted before the sale is entered in the accounts. Only the net amount is recorded as sales revenue.
- **Settlement discounts** are accounted for only when actually taken by the customer. If a customer claims the discount and pays less, the business must record the reduced cash received and the settlement discount allowed.

### **Worked Example 1.2**

A business sells goods on credit for \$1,000 after a 5% trade discount. The customer pays within the discount period and claims a 2% settlement discount.

**What are the entries?**

> **Answer:**
>
> Trade discount: \$1,000 × 5% = \$50. Invoice net of trade discount = \$950.
> Settlement discount: \$950 × 2% = \$19. Customer pays \$931.
> Entries:
>
> - Debit Cash \$931
> - Debit Settlement Discounts Allowed \$19
> - Credit Receivables \$950

## **BAD DEBTS AND IRRECOVERABLE DEBT WRITE-OFF**

Despite best efforts, not all customers will pay. If repeated attempts to collect a debt fail, or a debtor goes bankrupt, the business must accept that the money owed is "irrecoverable" (a bad debt). This must be removed from the accounts so that the financial records reflect the real position.

> **Key Term: irrecoverable debt**
> A debt which is believed will never be paid and is written off as an expense.

### **Double Entry for Writing Off Irrecoverable Debts**

When a debt is deemed uncollectible:

- **Debit:** Irrecoverable Debts Expense (profit or loss account)
- **Credit:** Receivables (to remove the amount owed from the customer’s account)

This increases expenses and reduces both trade receivables and profit.

### **Worked Example 1.3**

A business has an outstanding customer balance of \$800 that cannot be collected. Show the journal entry.

> **Answer:**
>
> Debit Irrecoverable Debts Expense \$800
> Credit Receivables \$800

### **Treatment of Recovered Debts**

Sometimes, after a debt has been written off, payment unexpectedly arrives. The previously written-off amount must now be recognized as income.

> **Key Term: bad debt recovered**
> A previously written-off debt that is later collected from the customer.
>
> **Key Term: allowance for doubtful debts**
> An estimate of debts that are unlikely to be collected but have not yet been written off.

### **Worked Example 1.4**

The business receives \$200 from a customer whose debt was written off last year.

> **Answer:**
>
> Debit Cash \$200
> Credit Irrecoverable Debts Expense (or Bad Debts Recovered Income) \$200

### **Exam Warning**

> **Exam Warning**
> Do not confuse "trade discount" (not entered in the ledger) with "settlement discount" (entered if and when claimed). Also, when writing off irrecoverable debts, make sure to reduce receivables and record an expense—do **not** simply remove the customer from the receivables listing.

## **Summary**

Receipts from customers must be matched to the correct invoices. Discounts—whether trade or settlement—affect the amounts recorded as sales and cash received. Trade discounts are deducted before recording revenue; settlement discounts are only recognized when taken. Bad debts are written off when payment can no longer be expected, reducing profit and receivables.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Recording receipts from credit and cash customers
- Correct treatment of trade and settlement discounts
- Accounting entries for irrecoverable debts write-off
- Effect of bad debts on profit and receivables
- Recognition of cash received for debts previously written off

## **Key Terms and Concepts**

- receipt
- remittance advice
- trade discount
- settlement discount
- irrecoverable debt
- bad debt recovered
- allowance for doubtful debts


Receipts, discounts, and bad debts - Irrecoverable debts write-off