Understanding Cash Discount Allowed to a Debtor

When a business sells goods or services on credit, the customer becomes a debtor, meaning they owe money to the business. Sometimes, a business offers a cash discount to encourage debtors to pay quickly. This is known as a cash discount allowed.

A cash discount allowed is essentially a reduction in the amount a debtor has to pay if they settle their debt within a specified period. For the business, this cash discount allowed is an expense because it reduces the amount of cash received below the amount originally owed.

Accounting Treatment for Cash Discount Allowed

Let's consider the journal entry when a debtor pays their dues and takes a cash discount allowed. Suppose a debtor owed £1,000 and pays £980, taking a £20 cash discount allowed. The business receives £980 in cash, allows a discount of £20, and the debtor's account is cleared by £1,000.

According to the rules of double-entry bookkeeping:

• Cash Account: An asset account. When cash is received, the asset increases, so the Cash Account is debited. ($\text{Debit: Cash Account} - £980$)
• Discount Allowed Account: An expense account. Expenses increase with a debit, so the Discount Allowed Account is debited. ($\text{Debit: Discount Allowed Account} - £20$)
• Debtor's Account (Customer's Account): A personal account representing the amount owed by the customer. The customer's balance decreases when they pay. To reduce the balance of a debtor (an asset), their account is credited. ($\text{Credit: Debtor's Account / Customer's Account} - £1,000$)

The journal entry would look like this:

$\quad \text{Debit: Cash Account} \quad \quad \quad \quad \quad \quad \£980$

$\quad \text{Debit: Discount Allowed Account} \quad \quad \£20$

$\quad \quad \quad \quad \text{Credit: Debtor's Account / Customer's Account} \quad \£1,000$

(Being cash received from debtor after allowing cash discount)

Identifying the Account to be Credited

From the journal entry and the explanation above, it is clear that when a cash discount allowed is given to a debtor who is making a payment, the **Customer's Account** (which is the Debtor's Account) is credited. This credit reduces the outstanding balance of the customer.

Evaluating the Options

Let's look at why the other options are not credited when a cash discount allowed is given:

• Discount Account: This refers to the Discount Allowed Account (an expense). As explained, expense accounts are debited when the expense is incurred (discount is allowed).
• Sales Account: This account is credited when sales of goods or services are made. It is not directly involved in the process of receiving payment from a debtor or allowing a cash discount allowed.
• Purchases Account: This account is debited when goods are purchased. It is related to purchases, not sales or collections from debtors.

Therefore, the account that should be credited when cash discount allowed to a debtor is the Customer's Account.