Settlement Discounts & credits - 3 Scenarios

SmileyP Registered Posts: 7 Regular contributor ⭐ ? ⭐
Interesting debate was had as to settlement discounts and their being credited:

Let's imagine early settlement of 3% within 10 days.

Are the following scenarios being treated correctly:

Scenario 1:

Invoice is raised offering a settlement discount. The invoice is credited in full and the figures on the credit are entered exactly as they were on the invoice.

Scenario 2:

Invoice is raised offering a settlement discount and paid with the early settlement being taken. Part of the invoice is later credited. The credit note NET figure is also discounted by 3% and the proportion of the "discounted" VAT amount.

Scenario 3:

Invoice is raised. 5 Days later a credit note is issued, showing the non-discounted NET figure and the "discounted" VAT figure. The customer then pays 3 days later therefore being entitled to a settlement discount on the invoice.

Does he:
A) Pay the discounted invoice LESS the full amounts on the credit.
b) Pay the discounted invoice LESS a "discounted" credit to reflect that the invoice value was reduced?

The last scenario is what gets my grey matter stirring! Can/Should you discount a credit if it relates to an unpaid invoice that is then paid with discount, after a credit is issued on that invoice?!

Thanks for your consideration!


  • coojee
    coojee Registered Posts: 794
    Not sure I fully understand your scenario 3, when you say non discounted net are you referring to a trade or bulk discount or the settlement discount? If it's the settlement discount then the net figure doesn't change (on the invoice) the discount is something that can be deducted later. Normal procedure when issuing a credit note for items on an invoice that had a settlement discount is to calculate VAT at the reduced amount (otherwise it won't match the VAT on the original invoice)

    Original invoice 5% settlement discount
    Item 1 Net 100 VAT 19
    Item 2 Net 50 VAT 9.50

    Discount available if paid in time 7.50

    Credit note for item 2 will be
    Net 50 VAT 9.50

    It can't be anything else otherwise it doesn't match the original. Balance now owing is 100 plus VAT 19 with 5 settlement discount available.

    If the balance of the original invoice is paid in time then they'll pay 114 if not paid in time, they'll paid 119

    Does that help?
  • SmileyP
    SmileyP Registered Posts: 7 Regular contributor ⭐ ? ⭐
    All of the discounts referred to are settlement discounts. I'll explain scenario 3 with some figures:

    Settlement discount of 3% if paid within 10 days:

    Invoice IV01 dated 1/1/12 for £100 NET £19.40 VAT Invoice total: £119.40
    Credit Note CR01 against invoice IV01 issued on 5/1/12 for £50 NET £9.70 VAT £59.70 TOTAL

    Payment is then made on the 8th, how much does he pay?
    IV01 (discounted) TOTAL £116.40 - CR01 £59.70 = £56.70
    IV01 (discounted) TOTAL £116.40 - CR01 (discounted as now relates to a discounted invoice) £58.20 = £58.20

    The reason for the question?
    Well, (as per scenario 2) if the invoice had been paid at £116.40 by itself, but then LATER credited, the credit would read £48.50 NET 9.70 VAT £58.20 TOTAL owing to the fact you are crediting according to the values paid on the invoice.

    The problem I'm proposing is one of timing of the transactions and how it affects the credit note value in respect to the invoice.

    Thanks for your response, let me know if this clarifies my query...
  • stevef
    stevef Registered Posts: 258 ? ? ?
    It has to £58.20, all the discounts and VAT calculations are red herrings until payment is received:
    You have issued an invoice for £100 with a 3% settlement discount plus VAT on the discounted amount;
    you then issue a credit note for £50 with a 3% settlement discount plus VAT on the discounted amount;
    leaving to pay £50 with a 3% settlement discount plus VAT on the discounted amount;
    Your customer pays within the time limit so earns his discount and pays
    £50 less 3% (£1.50) plus VAT (on £48.50), a total of £58.20.
  • coojee
    coojee Registered Posts: 794
    He pays 58.20 ie the balance of 119.40 - 59.70 = 59.70 less the settlement discount on the bit left 50 x 3% = 1.50.

    If he paid it all and then got a credit, the credit note would still be for 59.70 but you'd have to adjust for the discount. I always return to the double entry when working through problems like this.

    Entries when invoice issued:
    DR SLCA 119.40
    CR Sales 100
    CR VAT 19.40

    Then when paid:
    DR Bank 116.40
    CR SLCA 116.40

    and the discount:
    DR Discounts 3
    CR SLCA 3

    Then the credit note is:
    DR Returns 50
    DR VAT 9.70
    CR SLCA 59.70

    If you're going to pay the balance back to the supplier you'd do:
    DR SLCA 59.70
    CR Bank 58.20
    CR Discounts 1.50

    and if you're going to leave the balance on their account you'd do:
    DR SLCA 1.50
    CR Discounts 1.50

    That leaves a credit amount owing to the supplier of 58.70
  • SmileyP
    SmileyP Registered Posts: 7 Regular contributor ⭐ ? ⭐
    Thanks for your responses.

    Think the way you put it stevef was quite clear, thinking without the discounts is a good place to start. So the reality is that the customer will have to discount the invoice as normal, but also reduce the amount on the credit when making payment within the discount period. That is going to be a fun paper trail if they don't reduce the value of the credit.

    Always thought settlement discounts strange. I've only seen one in the last year and I think most companies are trying to stretch their cashflow so rarely take them - from the sectors I've worked in.

    Thanks for your help.

Privacy Policy