Cash Discount. Image credit

Cash Discount. Image credit

ZIMSEC O Level Principles of Accounts Notes: The Cash Book:Discount Received and Discount Allowed

  • Businesses prefer it if their customers pay quickly
  • Businesses may thus accept a sum slightly lower than the invoice amount in settlement of a debt if payment is made within a certain period
  • This reduction is known as a cash discount
  • Cash discount-an amount given in exchange and to encourage quick payment
  • Cash discounts are usually expressed as a percentage
  • This rate and other details as the dates when it is applicable is usually printed on invoices and other sales documents given to customers
  • This is done so as to encourage credit customers to quickly settle their accounts
  • Businesses typically have two types of cash discounts on their books
  • Discounts allowed:  these are the cash discounts allowed by a business to its customers when they pay
    their accounts quickly
  • Discounts received: these are cash discounts received by a business from its suppliers when it pays
    what it owes them quickly.
  • Discount allowed is an expense to the business and deducted as expenses in the Profit and Loss account at the end of the period while Discount received is treated as other income in the Profit and Loss at the end of the period
  • Discount allowed and Discount received are found in the General Ledger
  • However it is common business practice to record the Discount Received and Discount Allowed amounts in the Cash Book
  • They are recorded in their own columns in the Cash Book instead
  • Discount Allowed is a column on the debit side of Cash Book
  • Discount Received is a column found on the credit side of the Cash Book
  • When a creditor is paid and the business receives a discount the discount received is recorded in the discount received column and the corresponding entry appears as a debit in the creditor’s account
  • When a debtor pays their account and is allowed the discount is recorded in the discount allowed column and the debtor’s account is credited with the discount amount
  • The total of Discounts Allowed at the end of the period is recorded on the debit side of the Discounts Allowed account
  • The total of Discounts Received at the end of the period is recorded on the credit side of the Discounts Received Account

To access more topics go to the Principles of Accounts Notes.

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