Question

Riga Ltd offers a 4% early settlement discount to any customer who pay within 7 days of receiving an invoice. Riga Ltd sold goods priced at £1,500 on credit to a customer who is expected to take advantage of the early settlement discount.

What is the double-entry to record this transaction (ignore VAT)?

Answer 1

The double-entry to record a sale with an expected early settlement discount at Riga Ltd includes debiting Accounts Receivable for the discounted price, crediting Sales Revenue for the full price, and debiting Sales Discounts for the discount amount.

Step-by-step explanation:

The student is asking about the double-entry needed to record a transaction in which a 4% early settlement discount is expected to be taken by a customer when they pay within 7 days of receiving an invoice from Riga Ltd. The initial credit transaction is for goods priced at £1,500. To record the transaction accurately with the expected discount applied, we would make the following entries:

• Debit Accounts Receivable for the expected payment amount (after discount): £1,440 (£1,500 - 4% of £1,500).
• Credit Sales Revenue for the full price of the goods: £1,500.
• Debit Sales Discounts for the discount amount: £60 (4% of £1,500).

Riga Ltd records the expected early payment discount by debiting Sales Discounts (which reduces revenue) and reducing the Accounts Receivable by the same amount.