This is the last article in our series about discounts.
In part 1 we discussed what they are and how we calculate them. In part 2 we looked at how each type of discount is shown on an invoice, how those invoices are entered into the accounting records at the point they are sent to the customer, and then how the accounts are updated once a payment is received.
For trade and bulk discounts we saw that once the discount had been deducted on the invoice it had no further effect on the accounting records. Invoices that include the offer of a prompt payment discount (PPD) though, do not have the value of the discount deducted from the invoice total. This is because it is the customer’s decision to take the discount or not. If the discount is not taken then, like the other two types of discount, there will be no effect on the accounting records. However, if the discount is taken, the result will be a discrepancy between the amount invoiced and the amount received.
When processing receipts for invoices that offered PPD, the first step is to check that the payment was received within the timescale specified and therefore the deduction of the discount is valid. In order to do this we need to know:
- The invoice date
- The PPD details
A review of the invoice provides these:
The invoice date is 21st May. The PPD is deductible if the payment is received within 7 days. Therefore, to calculate the date the invoice needs to be settle by, we start with 21 and add on 7, which means the receipt needs to be received by 28th May.
In part 2 we processed the invoice and entered it into the accounting records and then jumped forward to 26th May to when we banked the receipt. A comparison of the dates tells us the deduction of the discount is valid.
Next we need to check the correct amount has been deducted. As PPD is a percentage of the invoice total, the calculation is:
£5,940 ÷ 100 x 3 = £178.20 (discount)
£5,940 – £178.20 = £5,761.80 (expected receipt)
The amount received into the bank account is therefore correct:
Now we have to deal with the discrepancy between the amount invoiced and the amount received, in other words the discount allowed.
This is done by raising a credit note for the value of the discrepancy. Be mindful of the fact that, as the discount was based on the invoice total, it includes VAT and therefore this needs to be reflected in the credit note:
The credit note is then entered into the accounting records via the daybooks. The sales daybook cannot be used as the value of the sale we originally recorded there is correct. We cannot use the sales returns daybook either as, even though we have raised a credit note, none of the goods have been returned. We want to record that fact that the customer has been given a discount in return for paying the invoice earlier than the standard terms. The result of that is that the income that has not been received from Love Outdoors Ltd has become an expense to Snow Days, in other words, it is the cost of incentivising the prompt payment.
The discounts allowed daybook is the correct daybook to use in this situation:
The final step is to post the discounts allowed daybook into the accounts:
The accounts in both ledgers now accurately reflect the value of the sale, the cost of getting the customer to pay the invoice promptly and that fact that the invoice has been settled in full.
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.