## **Learning Outcomes**

After reading this article, you will be able to record cash and bank receipts, distinguish settlement and trade discounts, and account for bad debts in the financial records. You will practice identifying the relevant entries for these transactions and ensure that receipts, discounts, and irrecoverable debts are correctly managed according to ACCA FA1 standards.

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

For ACCA Recording Financial Transactions (FA1), you are required to understand how businesses record receipts, handle discounts, and account for doubtful or irrecoverable debts. The following syllabus areas are covered in this article:

- Recording cash, cheque, and bank receipts accurately in the cash records and general ledger
- Understanding and processing various types of discounts (settlement and trade)
- Accounting for receipts from credit customers
- Identifying and writing off bad debts (irrecoverable receivables)
- Recognising the controls and documentation required for receipts

## **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 credit customer pays an outstanding invoice and takes advantage of a 2% settlement discount, what entries should be made in the general ledger?
2. What is the correct treatment for a debt that is no longer expected to be received?
3. True or false? Trade discounts are recorded in the general ledger accounts.
4. What is the difference between a cash receipt from a cash sale and a receipt from a credit customer?

## **Introduction**

Cash and bank receipts form a central part of business operations. Every business receives money from different sources—cash sales, credit customers paying their debts, bank interest, and other income. It is essential for accurate accounting to record these transactions promptly, manage discounts effectively, and identify any amounts that are not expected to be received. This article explains the correct methods for recording all types of receipts, different forms of discounts, and the treatment for irrecoverable or doubtful debts.

> **Key Term: receipt**
> An amount of money received by a business, whether in the form of cash, cheque, card, or electronic bank transfer.

## **Recording Cash and Bank Receipts**

Every receipt—whether taken at the point of sale or received from a customer at a later date—must be recorded in the accounting records. Immediate receipts from cash sales go directly to the cash or bank account. Receipts from credit customers settle outstanding invoices. Supporting documentation, such as cash register summaries, remittance advices, or bank statements, should always be available for each receipt.

### Receipts from Cash Sales

Cash sales are recorded at the time the transaction occurs. The entry in the general ledger is a debit to the cash or bank account and a credit to sales income.

> **Key Term: cash sale**
> A sale in which payment is received immediately, at the time the goods or services are provided.

### Receipts from Credit Customers

Receipts from credit customers clear outstanding amounts on their receivables ledger accounts. The receipt is debited to cash/bank and credited to receivables.

> **Key Term: receivable**
> A person or business that owes money to the company, usually as a result of a credit sale.

### Recording Process

All receipts should be summarised, often daily, in a cash receipts book or bank receipts journal. Each receipt is analysed by source: customer payments, cash sales, or other income. These totals are then posted to the relevant ledger accounts.

### **Worked Example 1.1**

On 14 April, a business receives \$500 in cash sales, and a cheque for \$300 from a credit customer. Record the entries in the relevant ledger accounts.

> **Answer:**
>
> - Cash at bank: Debit \$800 (total received)
> - Sales: Credit \$500
> - Receivables: Credit \$300

## **Types of Discounts**

Businesses use discounts to encourage larger purchases or quicker payment. The accounting treatment depends on the type of discount.

### Trade Discount

Trade discounts are reductions in the selling price, usually offered for bulk orders or to special customers. They are deducted before the sale is recorded and are not entered separately in the ledgers.

> **Key Term: trade discount**
> A deduction from the list price of goods or services, typically arranged in advance and applied before accounting records are made.
>
> **Key Term: settlement discount**
> A discount offered to encourage payment before a specified date, also known as a prompt payment or early settlement discount.

### Settlement Discount

Settlement discounts are only taken if payment is made within agreed terms. They are recorded in the accounting system at the time payment is received.

#### Accounting for Settlement Discounts

If a customer pays an invoice early and takes a settlement discount, the business must adjust the receivables balance:

- Debit Cash/Bank: for the amount received
- Debit Settlement Discount Allowed (an expense): for the discount taken
- Credit Receivables: for the full amount originally owed

### **Worked Example 1.2**

A business invoices a customer for \$1,000. The customer pays within 10 days and is offered a 2% settlement discount. How is this recorded?

> **Answer:**
>
> - Receipt: \$980 (true cash received)
> - Discount allowed: \$20 (2% of \$1,000)
> - Entries:
>   - Debit Cash/Bank \$980
>   - Debit Discount Allowed \$20
>   - Credit Receivables \$1,000

### Exam Warning

> **Exam Warning**
> Remember: Trade discounts are never recorded in the ledgers. Only the final, discounted amount is posted. Settlement discounts must be recognised at the moment they are actually taken.

## **Bad Debts (Irrecoverable Debts)**

Sometimes, despite reminders, a customer fails to pay. When it becomes certain that a debt will not be received, it must be written off as an irrecoverable or bad debt.

> **Key Term: irrecoverable debt**
> An amount owed to the business that is deemed impossible to collect and is written off as an expense.

### Writing Off Bad Debts

When a bad debt is identified:

- Debit Irrecoverable Debts Expense (statement of profit or loss)
- Credit Receivables (to reduce the amount owed)

This ensures that profit is not overstated by amounts that are never going to be received.

### **Worked Example 1.3**

The ledger shows that T Ltd owes \$600, but this amount is now considered irrecoverable. Record the entries.

> **Answer:**
>
> - Debit Irrecoverable Debts Expense \$600
> - Credit Receivables \$600

### Recovery of Written-Off Debts

Occasionally, a customer pays after the debt was written off. If this happens, the business reverses the original write-off:

- Debit Cash/Bank
- Credit Irrecoverable Debts Expense

### Revision Tip

> **Revision Tip**
> Always review overdue accounts regularly. Write off debts promptly once they are confirmed irrecoverable to keep financial records accurate.

## **Summary**

Cash and bank receipts must be recorded promptly and accurately. Trade discounts are deducted before sale and not entered in the ledgers. Settlement discounts are entered at payment if taken. Bad debts are removed from receivables through an expense entry, ensuring that the business does not overstate its income or working capital.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Record all cash and bank receipts accurately in the accounting system
- Recognise and process trade and settlement discounts appropriately
- Account for receipts from credit customers in both receivables and cash/bank accounts
- Identify and write off irrecoverable (bad) debts correctly
- Understand the difference between trade discounts and settlement discounts in accounting records

## **Key Terms and Concepts**

- receipt
- cash sale
- receivable
- trade discount
- settlement discount
- irrecoverable debt


Receipts, discounts, and bad debts - Recording cash and bank receipts