Paying a supplier early with a discount involves which arrangement?

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

Answer: (B)

When you pay a supplier early and take a discount, you’re settling the liability for the full invoice while reducing the cash you actually pay. In double-entry terms, you remove the creditor’s liability by debiting Trade Creditors for the full invoice amount. You then reflect the actual cash outlay by crediting Bank for the discounted amount paid. The discount itself is recorded as a credit to Purchase Discounts Received, which reduces the overall cost of purchases on the income statement.

This setup balances correctly: the debit equals the total of the cash paid plus the discount, and the Purchase Discounts Received shows the benefit of paying early. Other options would either debit the wrong accounts or treat the discount in a way that would not properly reduce purchases or clear the liability.