A business received a cheque for $2 800 from a credit customer in full settlement of a debt of $3 000. What are the correct entries to record this transacti...
Question 1 Report
A business received a cheque for $2 800 from a credit customer in full settlement of a debt of $3 000. What are the correct entries to record this transaction?
Answer Details
The correct answer is: Debit bank $2 800, debit discount allowed $200, credit trade receivables $3 000.
The customer owed $3 000 but paid only $2 800 in full settlement. The difference of $200 is a cash discount allowed by the business to encourage early payment.
The entries are:
- Debit bank $2 800 (cash received)
- Debit discount allowed $200 (expense of giving the discount)
- Credit trade receivables $3 000 (the full debt is cleared from the customer's account)
Recording only $2 800 on both sides would leave $200 still showing as owed, which is incorrect since the debt was settled in full. The discount allowed must be recorded to close the balance.
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