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Good day! I’ve learned that purchases are recorded net of trade discounts, but inclusive of settlement discounts. So, the correct journal entries for initial purchase are: dr purchases 1000, cr payables 1000 (settlement discount not taken into account). When paid, dr payables 1000, cr cash 980, cr settlement discount received 20. Are all these correct?
Yes they are correct. (But the treatment is different for sales).
This is actually covered in our free notes and lectures – they are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
Thank you sir. One thing I did not fully comprehend is why in this question settlement discount is extracted from payables? After all, payables is credited when created and debited when paid with whole amount without taking into account the settlement discount.
Question from BPP 15.15:
The balance on Jude Co’s trade payables account is $31554. The accountant at Jude Co has discovered that she has not recorded:
• A settlement discount of $53 received from a supplier; and
• A supplier’s invoice for $622. What amount should be reported for payables on Jude Co’s statement of financial position?So, in this question I added $622 to $31554, but did not use $53.
The reason is that when they received the cash they will have debited cash and credited payables. Then because of the discount they will credit payables and debit discounts received. That is the same net effect as what you wrote in your previous journal entry, but must be the case because they had not entered the discount.
Again, have you watched my lecture on this?
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