A customer owes £4,000 and pays £3,880 by cheque in full settlement under an early payment discount. What is the double entry?
Answer and explanation
Correct answer: D. Debit bank £3,880, debit discount allowed £120, credit trade receivables £4,000
- Step 1: The customer's account must be cleared: credit trade receivables £4,000.
- Step 2: Cash actually received is £3,880: debit bank.
- Step 3: The £120 difference is a settlement discount allowed, an expense: debit discount allowed £120.
Answer
Debit bank £3,880, debit discount allowed £120, credit trade receivables £4,000.
Why not the others: This leaves £120 on the customer's account although the debt has been settled. Discount received arises on payments to suppliers. Bank also records the wrong amount. This credits the discount instead of debiting it and makes the receivable credit wrong.
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