Cash settlement discounts

System

Hi Everyone

I am currently studying the diploma pathway at certificate level at the moment and am loving every minute of it.

I'm having a problem with cash settlements if any one can kindly help me out. If...

eg. A business sells 100 trainers at £40 each (after trade discount)It allows a 5% settlement discount.

The invoice would read

100 x £40 = £4000
4000 x 5% = £200
4000 - 200(sett Discount)= £3800

Now, is the vat worked out off the original invoice total (£4000) or the new invoice total (£3800) :?: :?:

I am thinking the vat is worked out off the new discounted price (£3800) but the original price of £4000 is shown on the invoice, this would make the invoice total £4665.00 Is this correct?? and if so, why don't we show the invoice price as £4465 (which is the price using the new invoice total)

Hope I've not completley confused everyone LOL

Hope this makes sense, would appreciate any help

Thanks

Shelley

System

Re:Cash settlement discounts

Hi

My understanding is that the £200 is taken off when they pay the debt.

Your calculation is correct. ie £665 for vat and £4665 total invoice.

Sales Daybook would have $4665 as gross, £665 in vat, £4000 as net. Then post to Sales Ledger (debit).
(The Net for £4000 would merge into your total Net from Day Book which would be posted to Sales Account - Main Ledger.)

When they pay, you would have £200 in Discount Allowed in Cashbook, and £4465 in bank/cash (debit side). Then post both to credit, so it balances off against debt, and also post to Discount Allowed account (Debit).

It is likely you will be using control account, so adjust accordingly, ie extra entries needed.

In explanation of why they do it ????

At moment, for Foundation at least, we've been told to just assume that they get the discount, even if they are late in paying the invoice. In theory, they only get the discount if they pay within the deadline (eg 30 days). Hence, you have to put the whole invoice value in, until it is paid. Also, i think that in practice, you would calculate the discount again at the end of month, and then record in books, rather than recording on invoice itself...

Hope that helps.

Glad to see that you are enjoying yourself!

Far better to enjoy what you do...

Wah-Hey! Champion! I'm 'Regular' now! :thumbup:

System

Re:Cash settlement discounts

Thank you so much it complete makes sense now, was having a blonde moment he he

Thanks again!!!!