settlement discounts in main ledgers

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
can someone please help me.

im in my first few months off aat's and im stuck on something that is seriously holding me back. if someone recievs a settlement discount how do you show this in your main ledger??

does it go with all the trade discounts or does it go against the vat.

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:settlement discounts in main ledgers

    Settlement discount is when you pay an invoice promptly or within seven days, or whatever the terms are stated on the invoice.
    The net amount is reduced by the amount of discount and the VAT remains the same as entered on the invoice. Usually the original net amount is debited to the appropriate account in the main ledger ( purchases ) the discount is credited to a discount account, usually this would be kept separate from the trade discount account for Management Reports as it is a different type of discount and it is more useful to see it stand alone. The VAT on a purchase invoice is debited to the VAT account.
    VAT is not affected by any discount and must be entered in the main ledger exactly as it appears on the invoice.
    The subsidiary account, i.e. the suppliers account and the creditor control account are credited with the total of the invoice less settlement discount, in other words the amount which you will be paying them.
    Hope this has helped.
    Anne Marie.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:settlement discounts in main ledgers

    When the invoice is raised:

    1) the full goods figure is entered on the invoice and credited to the sales ledger/sales nominal.

    2) The VAT is raised on the amount of the goods LESS the settlement discount.

    e.g.
    If the sale is for goods of £100 but 10% settlement discount is offered, then the original invoice will be:

    £100 goods + vat of £15.75 (£90 * 0.175)

    so it goes in the sales ledger at a total value of £115.75.

    When the invoice is paid, if they take the settlement discount the double entry in the nominal ledger is:

    Debit Cash 105.75
    Credit Debtors Control 115.75
    Debit Discounts Allowed 10.00

    i.e. an entry is made to discount only when the invoice is paid and only if they paid in time and took the settlement discount.

    Adrian




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