## **Learning Outcomes**

After reading this article, you will be able to identify the structure and purpose of the cash book, distinguish between trade and settlement discounts, account for discounts both received and allowed using proper double-entry, and explain their impact on financial statements. You will learn to differentiate between the seller’s and buyer’s viewpoints and handle common exam scenarios involving discounts and the cash book.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand how discounts and the cash book interact within basic bookkeeping, including the treatment of discounts allowed to customers and discounts received from suppliers. Your revision should focus on:

- The structure and role of the cash book as a book of prime entry and a ledger account
- Recording cash and bank transactions, including those involving discounts received and allowed
- Applying double-entry principles for settlement discounts allowed and received
- Recognising the distinction between trade discounts and settlement discounts in the records
- Understanding how discounts affect receivables, payables, and revenue/expenses in the financial statements

## **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. What is the main difference between a trade discount and a settlement (cash) discount in accounting records?
2. When an entity receives a settlement discount upon paying a supplier early, what is the effect on the payables and discount received accounts?
3. If a customer pays early and claims a settlement discount, how is this reflected in the cash book and general ledger accounts?
4. True or false? Trade discounts must always be entered into the general ledger.

## **Introduction**

The cash book is a key accounting record, serving as both a book of original entry and a ledger account. It tracks all cash and bank movements, including transactions involving discounts. Understanding how to handle discounts received from suppliers and discounts allowed to customers—especially settlement discounts—ensures accuracy in financial reporting and avoids common bookkeeping errors.

> **Key Term: cash book**
> A primary accounting record that combines the function of a book of prime entry and a ledger, used to record all cash and bank transactions on a daily basis.
>
> **Key Term: discount allowed**
> A reduction in the amount receivable from a customer, usually offered for early payment as an incentive.
>
> **Key Term: discount received**
> A reduction in the amount payable to a supplier, typically granted when payment is made ahead of the due date.

## **Cash Book Structures**

### Structure and Purpose

The cash book is usually divided into two sections: receipts (debit side) and payments (credit side). It facilitates the recording of:

- Cash and bank receipts from customers (including after the deduction of any discounts allowed)
- Payments to suppliers (net of any discounts received)
- All other money received and paid

The cash book also records the discount columns for discounts allowed (on receipts from customers) and discounts received (on payments to suppliers), to enable immediate recognition and later posting to the appropriate general ledger accounts.

### Types of Discounts

There are two main types relevant for FA2 students:

#### Trade Discount

This is a deduction from the list price, often for bulk purchases or long-standing customers, agreed before the sale takes place. **Trade discounts are never entered in the accounting records**—transactions are recorded at the net price after deducting the trade discount.

#### Settlement (Cash) Discount

A settlement discount (sometimes called cash or prompt payment discount) is an incentive to pay before the credit period ends. It only becomes actual if payment is made early. These discounts are recorded because the amount received or paid will differ from the invoiced value.

> **Key Term: trade discount**
> A deduction from list price given at the time of sale, excluded from the accounting records as only net amounts are recorded.
>
> **Key Term: settlement discount (cash discount)**
> A reduction in the amount payable or receivable, offered for early payment, only recorded if and when taken up.

### Double-Entry for Discounts

#### Discount Allowed (Seller’s Viewpoint)

When a credit customer settles early and claims a settlement discount, the seller receives less cash than the invoice total. The reduction is recognised as an expense—discount allowed.

#### Discount Received (Buyer’s Viewpoint)

When an entity pays a supplier early and benefits from a settlement discount, the amount paid is lower than the invoice value. The saving is recognised as income—discount received.

### **Worked Example 1.1**

A supplier invoices an entity \$1,000. Payment terms offer a 2% discount if paid within 10 days. The entity pays \$980 within the discount period.

**Question:** What are the entries in the cash book and the general ledger for the payment to the supplier?

> **Answer:**
>
> - Cash book (payment side): Record the amount paid (\$980) in the Bank column and \$20 in the Discounts Received column.
> - General ledger: Debit Trade Payables \$1,000; Credit Cash/Bank \$980; Credit Discounts Received \$20.

### **Worked Example 1.2**

A business makes a credit sale of \$500 with terms “2% discount for payment within 14 days.” The customer pays within the period, sending \$490.

**Question:** How does the business account for this?

> **Answer:**
>
> - Cash book (receipt side): Record \$490 in the Bank column, \$10 in the Discounts Allowed column.
> - General ledger: Debit Cash/Bank \$490; Debit Discounts Allowed \$10; Credit Trade Receivables \$500.

### **Exam Warning**

> Failing to distinguish correctly between trade and settlement discounts may result in double counting the value reduction or omitting discount income/expense from the financial statements. Trade discounts are not recorded in the accounts; settlement discounts are, but only when taken.

## **Discounts in the Cash Book**

In practice:

- The cash book discount columns accumulate discounts allowed and received over a period.
- At the period end, these totals are posted to the respective general ledger accounts—Discounts Allowed (expense) and Discounts Received (income).
- The cash or bank columns reflect the actual cash movement.

### Example Cash Book Layout (Simplified)

| Date | Details  | Bank | Discounts Allowed | Discounts Received |
| ---- | -------- | ---- | ----------------- | ------------------ |
| ...  | Receipts |      | xx                |                    |
| ...  | Payments |      |                   | xx                 |

At period end:

- The Discount Allowed column total is posted to the Discounts Allowed account.
- The Discount Received column total is posted to the Discounts Received account.

## **Financial Statement Effects**

- Discounts allowed (seller’s view) appear as an expense in the statement of profit or loss, typically offsetting revenue.
- Discounts received (buyer’s view) appear as other income, offsetting purchases or grouped under income in the profit or loss statement.

## **Summary**

Both discounts allowed and received affect reported profit. Only settlement (not trade) discounts require actual entries in the accounts. The cash book facilitates their identification and posting to the relevant ledger accounts, ensuring accurate reporting of receipts, payments, income, and expenses.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Recognise the structure and function of the cash book in recording cash and bank movements
- Distinguish between trade and settlement discounts and their accounting treatment
- Record settlement discounts allowed and received using cash book and double-entry
- Post totals from the cash book discount columns to the appropriate ledger accounts
- Identify the impact of discounts on financial statements
- Avoid common mistakes regarding trade versus settlement discounts

## **Key Terms and Concepts**

- cash book
- discount allowed
- discount received
- trade discount
- settlement discount (cash discount)

Cash book structures - Discounts received and allowed