Settlement Discounts

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi there

I started the course 2 weeks late so am on 'catch up'. Having gone through the tutorial book, all seems pretty straight forward, except settlement discounts. Help!! I understand the 'how' but what about the 'why'?

eg:

If the net total of an invoice is £200.00, with a settlement discount of 2.5%, then VAT is calculated on £195. Fine, got that, presumably it's worked out that way so that the VAT man gets what is correct. BUT what does the customer pay? Do they pay £195 plus VAT of £34.12 or do they pay £200 plus VAT of £34.12? If its £200 plus £34.12 then the supplier isn't giving a discount at all, the VAT man is??!!!!

Please help!!!! Hope this all makes sense to someone.

Thank you everyone.

Dawn

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    Hmmmm: The VAT man never gives a discount! If he ever does in your calculations then you know you've gone wrong somewhere.

    In answer to your question:

    The customer will pay the £195.00 plus the £34.12 VAT. In total £229.12.

    You've mentioned that it is a settlement discount so don't forget that even if the discount is lost by the customer (for failing to pay in time) the VAT will not change.

    eg: the customer will pay £234.12.

    numbernumb
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    I beg to differ....
    The whole point of a settlement discount is that it is optional.
    If the customer pays within the stated period (ie 7 days/ one month, etc) they can take the settlement discount ie pay £229.12.
    If they pay late they have to pay £234.12.

    Whichever way we invoice them for £234.12 ie the original price plus the discounted VAT rate.

    It's up to them when and what they pay.

    VAT IS ALWAYS CALCULATED FROM THE DISCOUNTED RATE.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    Apologies my mistake on this one.

    kimebeard is correct.

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    Hi,
    I thought I understood this but it seems to have completely gone from my mind... can someone explain the double entry to me, if the customer takes the discount...

    Thanks!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    Credit sales ledger control account
    Debit discounts allowed.

    Kind regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Settlement Discounts

    Thanks! Got it straight in my head now!

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