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Hi Jonh,
The question:
Your organisation sold goods to PQ Co for $800, trade discount 20% and cash discount 5% for payment within 14 days. The invoice was settled by cheque five days later. Which one of the following gives the entries required to record BOTH of these transactions?answer is:
DEBIT CREDIT
A) PQ Co 640
Sales 640
Bank 608
Discount allowed 32
PQ Co 640I understand the calculation of the figures here but I don’t understand the double entry.
1. What does PQ Co here referred to, is it a cash received from PQ Co or else? Because the first entry is Dr. balance and second entry is Cr. balance.
2. What is the balance of discount allowed? When I did the receivable control a/c reconciliation discount allow will reduce the receivable (Cr. Balance) but here it’s Dr. Balance.Could you please make an explanation for this?
Thanks,
P.S I already watched your related tutorials
Although I will answer your question, in future you must ask in the Ask the Tutor Forum is you want me to answer – this forum is for students to help each other.
PQ is the customer, and it is referring to the receivables account. Dr it when we are owned money by PQ.
The amount on the invoice will be 800 less the trade discount of 20%, which is 640.
So Dr Receivables (PQ) 640; Cr Sales 640.
Because they pay within the 14 days, they will only pay 640 less 5%, which is 608.
When the cash is received, Dr Cash (Bank) 608; Cr Receivables (PQ) 608.
The balance left on receivables of 32 is the discount allowed.
Dr Discount allowed 32; Cr Receivables (PQ) 32.
However, the answer in the solution has done the last 2 entries together all as one (which is fine).
Dr Cash (Bank) 608
Dr Discount allowed 32
Cr Receivables (PQ) 640 (608 + 32)The balance on discount allowed is therefore a debit of 32 (although that is irrelevant in that it is not asked for in the question).
Reconciling the control account is also not relevant – it is nothing to do with the question.Thank you very much for your clear explanation. Sorry for any inconveniences by posting my question here. I didn’t mean to post it here. I was accidentally clicked on the choose forum option and since my question is related to F3, I confused posting it here. I didn’t know it’s only for student to help each other only.
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