Taking the first point first:
1. The word debit comes from the Latin verb debere, meaning ‘to owe’; debit is the Latin for he or she owes. In business, a person owes to the proprietor that which was loaned or given to him by the proprietor.
2. The word credit comes from the Latin verb credere, meaning ‘to trust’ or ‘to believe’. Our creditors believe in our integrity, and trust us to pay them for goods and services they supply; so they are willing to deliver them without asking for immediate payment.
Perhaps this will help a little in personal ledger accounts; but what about the impersonal accounts of the nominal ledger? Whenever an account has a debit balance it means that it ‘owes’ the proprietor the value of it (and vice versa for credit balances), as if that account were a person.
RED HOUSE CEMENT WORKS Mulvy Island Road
Anytown, Anyshire.
Invoice No: 002345
£ p
100 Bags of cement @ £10 1,000.00
Less 35% trade discount 350.00
650.00
Plus VAT 113.75
Total 763.75
Terms strictly 30 days net
Fig. 41. Example of the way trade discount may be shown on a wholesaler’s invoice to a retailer.
S. JONES (WHOLESALE STATIONERY SUPPLIES) LTD 210 Barton High Street, Barton, Barshire
Invoice No: 00322 10/2/200X
10 reams of typing paper @ £7 70.00
plus VAT 17½% 12.25
82.25 2½% early settlement discount
Deduct £2.06 if paid within 14 days.
Customer Razi & Thaung 15 Bolton Road Finchester
Fig. 42. Example of the way early settlement discount may be shown on an invoice.
Trade discounts
A trade discount is one given by wholesalers to retailers, so that the retailers can make a profit on the price at which they sell goods to the public. Example:
Wholesale price of 5 litre tin of paint: £4.00
Trade discount: £2.00
Recommended retail price: £6.00
In this example, the trade discount is 331/
3of the recommended retail price.
However, trade discounts have no place as such in a firm’s accounts. They are deducted before any entry is made in any of the books. As far as the wholesaler is concerned, his price to the retailer is simply £4.00, so £4.00 is the amount the wholesaler enters in his sales day book, and the amount the retailer enters in his purchase day book.
Early settlement discounts
These are discounts offered to persuade customers to settle their debts to the firm early. Typically, a discount of 2½% might be offered for payment within 14 days. But the details can vary. Example:
Building materials supplied: £200.00
Less 2% discount for settlement within 7 days: £ 4.00 £196.00
Firms offer such discounts for two reasons: to speed up cash flow and to reduce the chance of debts becoming bad debts (the longer a debt remains outstanding, the more likely it is to become a bad debt).
If you write up your day books daily, you will not know whether or not an early settlement discount will be taken. You will know once the actual payment arrives. So you have to enter the figure without any deduction of discount into your sales day book. When the debt is paid, if a discount has been properly claimed, the credit entry to that customer’s account will be 2½% less than the account shows. You then need to enter the discount as a credit to his account and a debit to ‘discount allowed account’ in the nominal ledger. This will make up the shortfall. It has the same effect as cash on the customer’s personal account— and so it should: the offer shown on the invoice is like a ‘money off voucher’, and we would expect to treat that the same as cash.
Discounts and VAT
An early settlement discount is based on the invoice total (including VAT). Whether it is claimed or not will not alter the net sale value or the VAT amount which will be entered in the books.
CASH BOOK
Dr. Cr.
Date Particulars Fo. Discount Cash Bank Date Particulars Fo. Discount Cash Bank
200X 200X
Mar 1 Balance b/d 50.00 1,000.00 Mar 13 Eliot 7.64 297.81 13 Morgan & Baldwyn SL5 13.71 260.34
20 Edwards’ Garage SL7 193.40 28 A. Singh SL9 640.39 31 Balance c/d 50.00 1,796.32 13.71 50.00 2,094.13 7.64 50.00 2,094.13 Aprl 1 Balance b/d 50.00 1,796.32 PURCHASE LEDGER BL3 Dr. Eliot Transport Cr. 200X 200X Mar 1 Balance b/d 305.45 Mar 10 Bank CB8 297.81 10 Disc recd NL19 7.64 305.45 305.45 SALES LEDGER SL9 Dr. A. Singh Cr. 200X 200X
Mar 1 Balance b/d 674.10 Mar 1 Bank CB8 640.39
31 Balance c/d 33.71
674.10 674.10
SL18
Dr. Edwards Garage Cr.
200X 200X
Mar 1 Balance b/d 193.40 Mar 20 Bank 193.40
SL20
Dr. Morgan and Baldwin Cr.
200X 200X
Mar 1 Balance b/d 274.05 Mar 13 Bank CB8 260.34
13 Discount All NL18 13.71 274.05 274.05 NOMINAL LEDGER NL18 Dr. Discounts Allowed Cr. 200X 200X Mar 31 Debtors 13.71 NL19 Dr. Discounts Received Cr. 200X 200X Mar 31 Creditors 7.64
Fig. 43. Recording discounts in cash book and ledger.
Prime entry of discounts in the cash book
You make your prime entry of discounts in the cash book. But the column you use is unlike the other cash columns: it is not a ledger column, just a prime entry ‘lodging place’. Entries in the discount column of the cash book, unlike entries in its other (ledger) columns, are not part of a dual posting; the dual posting is made in the ‘discount allowed account’ in the nominal ledger for the one part, and the personal customer account in the sales ledger for the other (or ‘discounts received account’ and supplier account, as the case may be). The postings to the discount accounts in the nominal ledger are, of course, column totals rather than individual items.
Entering early settlement discounts
Both the cashier and the ledger clerk will be involved in entering early settlement discounts. When the cheques are first received from customers or sent out to suppliers the cashier will check whether they have been properly claimed by reference to the time limit for early settlement discount and then enter the discounts in the cash book when he/she is entering the other payment details. For this step-by-step process please refer to pages 27 and 29.
At the end of each month the ledger clerk will make the dual postings to the ledger accounts for each item in the discount columns of the cash book. Step by step
What you will need is the cash book, sales ledger, purchase ledger and nominal ledger.
1. One by one, post each item in the discounts received column to the debit of the named suppliers’ purchase ledger accounts.
2. Post the column total for the month to the credit of discounts received account in the nominal ledger.
3. One by one, post each item in the discounts allowed column to the credit of the named customers’ sales ledger accounts.
4. Post the column totals to the debit of discounts allowed account in the nominal ledger.