How would you treat a cash discount offered by a supplier for early payment?

• A. Record the discount as a reduction in purchases by crediting Purchase Discounts Received; example entry: Dr Trade Creditors 1000; Cr Bank 980; Cr Purchase Discounts Received 20.
• B. It should be recorded as an increase in Bank.
• C. It should be ignored.
• D. It is recorded as Sales Discounts Received.

Answer: (A)

When you pay a supplier early and get a cash discount, the saving is a reduction in the cost of purchases, not a revenue. The proper entry reflects settling the liability and the actual cash outlay, plus the discount itself. Debiting Trade Creditors removes the full amount owed, since you’re paying down that liability. Crediting Bank shows the cash you actually pay. The discount is recorded by crediting Purchase Discounts Received, which increases the income-side of the accounts (a contra-expense) and effectively reduces the cost of purchases for the period. This mirrors the real benefit: you’ve paid less cash than the amount you owed, and your purchases cost is reduced by the discount.

The other options would misstate the transaction: increasing Bank would imply more cash, which isn’t the case when you pay and save a discount; ignoring the discount ignores a genuine saving; recording as Sales Discounts Received would be inappropriate because that account relates to discounts given by you on sales, not discounts you receive on purchases.