Discounts & returns · Level: Exam
Journal entry: Cash discount allowed to a customer
The customer deducts a discount. The receivable is cleared in full; the discount reduces sales and output VAT.
Worked example
Hall Builders pays our invoice of £4,800.00 (including 20% VAT) by bank transfer and deducts a 3% cash discount.
Correct journal entry
Bank £4,656.00, Discounts allowed £120.00, Output VAT £24.00 / Trade receivables £4,800.00
Debit
Bank£4,656.00
Discounts allowed£120.00
Output VAT£24.00
Credit
Trade receivables£4,800.00
Why?
- Bank: asset increases → debit
- Discounts allowed: discount allowed reduces sales → debit
- Output VAT: liability decreases → debit
- Trade receivables: asset decreases → credit
Calculation
- Gross discount: 3% of £4,800.00 = £144.00
- of which £120.00 net and £24.00 VAT correction (output VAT goes down)
- Received: £4,800.00 − £144.00 = £4,656.00
Typical mistake
Clearing the receivable at the amount received only.
Your turn
Three problems on exactly this case, with different numbers. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
Johnson Ltd pays our invoice of £4,800.00 (including 20% VAT) by bank transfer and deducts a 2% cash discount.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
What is the journal entry for cash discount allowed to a customer?
Example: Bank £4,656.00, Discounts allowed £120.00, Output VAT £24.00 / Trade receivables £4,800.00.
How do I recognise this case?
The customer deducts a discount. The receivable is cleared in full; the discount reduces sales and output VAT.
What is the typical mistake?
Clearing the receivable at the amount received only.