## Learning Outcomes

After studying this article, you will be able to explain how sales and sales returns are recorded in the day books, distinguish between trade and prompt-payment (settlement) discounts, and calculate and record these discounts in the accounting system. You will also know how to process sales invoices and credit notes, ensuring correct classification and posting for the ACCA Recording Financial Transactions (FA1) exam.

## ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how sales and sales returns journals operate and how discounts impact accounting records. In particular, you should focus on:

- The roles of the sales day book and sales returns day book in the bookkeeping process
- The preparation and interpretation of sales invoices and credit notes
- The calculation and recording of trade discounts and prompt-payment (settlement) discounts
- The correct journal entries for sales, sales returns, and discounts
- The distinction between discounts and their treatment in accounting records

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which type of discount is deducted from a sales invoice before recording it in the sales day book?
2. If a customer pays within the early settlement period and claims a prompt-payment discount, how should this be recorded in the ledger?
3. What document is issued if a customer returns goods, and how is it recorded?
4. True or false? Trade discounts and settlement discounts are recorded in the accounting system in the same way.

## Introduction

The sales day book and sales returns day book are essential tools for recording credit sales and sales returns before posting to the ledgers. In practice, businesses may offer discounts to attract customers or encourage prompt payment. For ACCA FA1, knowing how trade discounts and prompt-payment (settlement) discounts affect both day books and the ledgers is critical for accurate financial records and assessment success.

> **Key Term: sales day book**
> A book of prime entry used to record credit sales before posting to the sales and receivables ledgers.
> **Key Term: sales returns day book**
> A book of prime entry used to record goods returned by customers before posting to the sales returns and receivables ledgers.
>
> **Test Tip:**
> When revising Trade and prompt-payment discounts, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### SALES AND SALES RETURNS DAY BOOKS

Recording transactions efficiently starts with accurate documentation. The sales day book is used to list all credit sales, usually based on copies of sales invoices. The sales returns day book is used to record goods returned by customers, based on credit notes issued.

### The Sales Day Book

Only credit sales are entered. Each sales invoice is listed with the customer name, invoice number, and the net amount after trade discounts (but before any settlement discount is considered).

### The Sales Returns Day Book

Goods returned are listed using credit notes as the source documents. Each credit note is entered with the customer name, credit note number, and the value of the return.

> **Key Term: sales invoice**
> A source document issued to a customer, showing the details and value of a credit sale.
> **Key Term: credit note**
> A source document sent to a customer to reduce the amount owed, often due to returns or errors.

### TRADE DISCOUNT vs PROMPT-PAYMENT DISCOUNT

It is important to distinguish between two common types of discount applied to sales.

![Trade and prompt-payment discount treatment from invoicing to receipt, including sales day book entry and receivables, bank, and discount allowed postings.](https://static.pastpaperhero.com/images/acca-fa1-sales-and-sales-returns-day-books-trade-and-prompt-payment-discounts_00.png)

_Trade discounts reduce the invoiced selling price, while settlement discounts are recognised only on payment through receivables, bank, and discount allowed._

### Trade Discount

Trade discounts are reductions in the list price, offered to certain customers (such as trade customers or for bulk purchases). The discounted amount is **not** recorded separately in the accounting records; sales are recorded at the net amount after deducting the trade discount.

> **Key Term: trade discount**
> A reduction in the list price granted to selected customers, typically not shown separately in the general ledger.

### Prompt-Payment (Settlement) Discount

Prompt-payment (settlement) discounts, sometimes called cash or early settlement discounts, are offered to encourage customers to pay promptly (e.g., “2% discount if paid within 10 days”). Unlike trade discounts, settlement discounts are **only recorded if the customer actually pays promptly** and claims the discount.

> **Key Term: prompt-payment (settlement) discount**
> A discount offered to customers for paying invoices within a specified period, recorded only if taken.

### ACCOUNTING FOR DISCOUNTS IN DAY BOOKS AND LEDGERS

- **Trade discounts** are deducted directly on the sales invoice and only the net amount is entered into the sales day book.
- **Prompt-payment discounts** are not shown in the sales day book. If a customer pays promptly and claims the discount, an additional ledger entry is made when payment is received.

### Worked Example 1.1

A business sells goods to Customer A with a list price of \$1,000, offering a 10% trade discount and 2% prompt-payment discount if paid within 7 days. Customer A pays within 7 days and claims both discounts. How are these discounts recorded?

> **Answer:**
> The sales invoice will show:
> List price: \$1,000
> Less trade discount (10%): \$100
> Invoice amount: \$900
> Only \$900 is entered in the sales day book. When Customer A pays within 7 days and claims the prompt-payment discount (2% of \$900 = \$18), the business receives \$882. The additional \$18 is recorded as a discount allowed in the ledger at the time of payment.

### SALES RETURNS AND CREDIT NOTES

When goods are returned by the customer, a credit note is issued. The value of the return is entered in the sales returns day book, excluding any trade discount but before settlement discount.

### Worked Example 1.2

Customer B returns goods originally invoiced at \$500 less a trade discount of 5%. How is this return recorded?

> **Answer:**
> Return value = \$500 x 95% = \$475
> The credit note and the sales returns day book both record \$475 for the returned goods.

### JOURNAL ENTRIES FOR SALES, RETURNS, AND DISCOUNTS

Each sales day book and sales returns day book total is periodically posted to the ledgers.

- Credit sales:
  Debit Receivables (for the net sale value)
  Credit Sales (for the net sale value)
- Sales returns:
  Debit Sales Returns (for the returned value)
  Credit Receivables

If settlement discount is taken, an extra entry is required only when payment occurs.

- Debit Discount Allowed (for the discount)
- Debit Cash/Bank (for the payment amount)
- Credit Receivables (for the total receivable)

### Worked Example 1.3

A \$600 invoice (net after trade discount) is issued to Customer C. They return \$150 of goods and pay the remaining \$450 within the settlement period, taking a 2% prompt-payment discount. What are the journal entries?

> **Answer:**
>
> 1. Record the sale:
>    Debit Receivables \$600
>    Credit Sales \$600
> 2. Record the return:
>    Debit Sales Returns \$150
>    Credit Receivables \$150
> 3. Customer pays balance promptly (\$450 x 98% = \$441):
>    Debit Discount Allowed \$9
>    Debit Cash \$441
>    Credit Receivables \$450
>
> **Exam Warning:**
> Be careful not to record trade discounts as a separate expense—they reduce the invoice value directly and do not appear in ledger accounts. Only settlement discounts that are actually taken should appear in the ledgers.

## Summary

- Only credit sales are entered in the sales day book, at the invoice amount after trade discounts.
- Sales returns are recorded in a separate day book, using credit notes.
- Trade discounts are not recorded separately in accounting records; settlement discounts are recognized only when taken.
- Totals from the day books are posted to the ledgers; settlement discounts are dealt with at payment time.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Define and distinguish the roles of the sales and sales returns day books
- Explain and calculate trade discounts and prompt-payment discounts
- Identify correct accounting for discounts in day books and ledgers
- Record sales, sales returns, and settlement discounts with correct journal entries
- Understand how credit notes are used to document sales returns

## Key Terms and Concepts

- sales day book
- sales returns day book
- sales invoice
- credit note
- trade discount
- prompt-payment (settlement) discount


Sales and sales returns day books - Trade and prompt-payment discounts