Discounts & returns · Level: Exam
Journal entry: Cash discount received from a supplier
We pay early and deduct a discount. The payable is cleared in full; the discount reduces the cost and the input VAT.
Worked example
We pay the invoice from Evans Ltd for £2,400.00 (including 20% VAT) by bank transfer, deducting a 2% cash discount.
Correct journal entry
Trade payables £2,400.00 / Bank £2,352.00, Discounts received £40.00, Input VAT £8.00
Debit
Trade payables£2,400.00
Credit
Bank£2,352.00
Discounts received£40.00
Input VAT£8.00
Why?
- Trade payables: liability decreases → debit
- Bank: asset decreases → credit
- Discounts received: discount received reduces the cost of goods → credit
- Input VAT: asset decreases → credit
Calculation
- Gross discount: 2% of £2,400.00 = £48.00
- of which £40.00 net and £8.00 VAT correction (input VAT goes down)
- Transfer: £2,400.00 − £48.00 = £2,352.00
Typical mistake
Forgetting the input VAT correction.
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
We pay the invoice from Brown Supplies plc for £12,000.00 (including 20% VAT) by bank transfer, deducting a 3% 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 received from a supplier?
Example: Trade payables £2,400.00 / Bank £2,352.00, Discounts received £40.00, Input VAT £8.00.
How do I recognise this case?
We pay early and deduct a discount. The payable is cleared in full; the discount reduces the cost and the input VAT.
What is the typical mistake?
Forgetting the input VAT correction.