Prompt payment discount
Also called: Settlement discount
What is a prompt payment discount?
A prompt payment discount is offered to a customer for paying early.
When the invoice is raised, nobody knows if the customer will pay early. So the invoice shows the full amount.
If the customer does pay early, the seller sends a credit note for the discount.
Example
An invoice is for £600.00, with 5 per cent off for payment within 14 days. Ignore VAT. The customer pays early, so it takes off £30.00 and pays £570.00.
Why it matters
For the seller the discount is an expense, kept in an account called Discounts allowed. On an invoice with VAT the discount comes off the VAT as well, and the credit note puts both right.
Practise it
See the first roomHow a prompt payment discount works
Ledger Drill is practice, not tax or accounting advice. If this looks wrong, tell us at [email protected].