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I believe the double entry for an early payment discount is, Dr creditor Cr other income (discount), but i recently watched a video on youtue in which they were explaining the entry as Dr Creditor Cr inventory and they gave the logic that this way inventory is stated at its true purchased cost. can you please explain the right treatment also explaining the logic. thanks !
For Paper F3, the entry is as you have stated – Dr Payables; Cr Discount received.
The logic being that by paying early (in order to get the discount) we are losing interest that we could otherwise have earned on the cash – i.e. it is more related to financial costs and benefits.With regard to the closing inventory, then this should be valued net of all discounts (but this is not relevant for Paper F3).
In practice, because of computers, there is likely to be perpetual inventory recording and therefore there is an argument for doing what you say is in the video.
However, for Paper F3, we always effectively assume manual accounting in which case inventory is only dealt with at the end of the period (and discounts received during the period are dealt with as per my first line).Thanks for the explanation. Actually i am not going to take f3, in fact, i have passed my p2 as well. I am asking this because i have to apply it in real life. we have perpetual inventory system and for cash discounts ,should i just cr the inventory or should i go for an other income account?
I think that I would credit inventory if it is perpetual recording, but to be perfectly honest I am not sure what would be correct.
Obviously for F3 it is irrelevant for me, and in practice nobody ever offers my company a cash discount and so I have never had to deal with it 🙂It might be an idea to ask the P2 tutor what he thinks.
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