Which entry correctly records a cash discount received when paying a supplier early?

Which entry correctly records a cash discount received when paying a supplier early?

• A. Dr Trade Creditors 1000; Cr Bank 980; Cr Purchase Discounts Received 20.
• B. Dr Bank 980; Cr Trade Creditors 1000; Cr Purchase Discounts Received 20.
• C. Dr Trade Creditors 1000; Dr Bank 980; Cr Purchase Discounts Received 20.
• D. Cr Trade Creditors 1000; Dr Bank 980; Cr Purchase Discounts Received 20.

Answer: (A)

When you pay a supplier early and take a cash discount, you settle the full liability but record the discount separately as a reduction in purchases. The correct entry shows the liability being cleared for its full amount, the cash paid, and the discount received. Record the full amount owed to Trade Creditors as a debit, reflect the actual cash leaving the bank as a credit, and credit Purchase Discounts Received for the discount amount. For example, if the supplier is owed 1000 and you pay 980 with a 20 discount, the entries are: Dr Trade Creditors 1000; Cr Bank 980; Cr Purchase Discounts Received 20. This balances (1000 = 980 + 20) and correctly shows the discount as a reduction to the cost of purchases. If the bank entry were a debit, or the trade creditors entry were a credit, or the discount entry were a debit, the totals wouldn’t balance and the effect on liabilities, cash, and the discount would be incorrect.

When you pay a supplier early and take a cash discount, you settle the full liability but record the discount separately as a reduction in purchases. The correct entry shows the liability being cleared for its full amount, the cash paid, and the discount received.

Record the full amount owed to Trade Creditors as a debit, reflect the actual cash leaving the bank as a credit, and credit Purchase Discounts Received for the discount amount. For example, if the supplier is owed 1000 and you pay 980 with a 20 discount, the entries are: Dr Trade Creditors 1000; Cr Bank 980; Cr Purchase Discounts Received 20. This balances (1000 = 980 + 20) and correctly shows the discount as a reduction to the cost of purchases.

If the bank entry were a debit, or the trade creditors entry were a credit, or the discount entry were a debit, the totals wouldn’t balance and the effect on liabilities, cash, and the discount would be incorrect.