If a discount is taken for early payment, which accounts are affected and how?

• A. Debit Trade Creditors for the full amount, credit Bank for the paid amount, and credit Purchase Discounts Received for the discount.
• B. Debit Bank for the full amount, credit Trade Creditors for the discount.
• C. Debit Purchases for the discount, credit Trade Debtors.
• D. Debit Purchase Discounts Received, credit Bank.

Answer: (A)

When a discount is taken for early payment, the liability to the supplier is reduced and the saving is recognized as a Purchase Discounts Received. The correct journal entry clears the full amount owed to the supplier, pays the actual cash out of the bank, and records the discount as income. Specifically, you debit Trade Creditors for the invoice total to remove the liability, credit Bank for the amount actually paid, and credit Purchase Discounts Received for the discount amount to reflect the saving. For example, on a £1,000 invoice with a £20 discount if paid early, you would record: Dr Trade Creditors £1,000; Cr Bank £980; Cr Purchase Discounts Received £20. This balances the books and shows both the settlement of the debt and the financial benefit of paying early. Other options miss the need to reflect the discount in Purchase Discounts Received or use inappropriate accounts for this transaction.