Bookkeeping 1Tutorial

Prompt Payment Discount for Assessments from January 2017

Prompt Payment Discount (PPD), previously referred to as ‘cash discount’ or ‘settlement discount’ has recentlybeen the subject of changes in legislation. The treatment of this type of discount in terms of invoicing and accounting entries is examinable by the AAT in the two Bookkeeping Units and Indirect Taxation.HMRC RegulationsSince 1 April 2015 sellers are no longer able to charge VAT on the discounted price. The situation now is thatsellers must:(a) include the VAT on the invoice as the full amount chargeable before any adjustment is made for Prompt

Payment Discount(b) then account for VAT on the money actually receivedThis supplement to the AQ2013 Bookkeeping 1 Tutorial shows how the text should be amended to reflect therevised treatment of Prompt Payment Discounts (PPD).

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AMENDMENTS TO CHAPTER 2FINANCIAL DOCUMENTS FOR SALESAAT assessments for the AQ2013 qualification are from January 2017 solely based on the following procedure:The invoice in all cases applies the normal rate of VAT on the full value of the goods or services. If the customer paysearly and takes advantage of the lower PPD charge, a lower amount of VAT will be due to HMRC but the invoice willcontinue to show the full total and relevant VAT before the deduction of PPD. The seller will then have to issue to the cus-tomer a credit note ‘refund’ (which will include VAT) for the amount of the Prompt Payment Discount given.The invoice (full amount) and the credit note (refund of any PPD) will then be entered into the accounts to adjust theamount charged.An example of how this works is shown in the following example.

AMENDMENTS TO QUESTION 2.4

Page 40 Activity 2.4. The text on page 40 should be amended as follows:2.4 If the invoices in Activity 2.3 above allowed Prompt Payment Discount to be deducted from the amount paid, what

would be the totals (including VAT) of the credit note issued in each case to account for the Prompt Payment Discount?

Page 262 Answer to Activity 2.4(a) £3.84(b) £9.60(c) £1.20(d) £192.00

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AMENDMENTS TO CHAPTER 4ACCOUNTING SYSTEM FOR DISCOUNTS ALLOWED

On the following pages we see how accounting for prompt payment discount (PPD) in the supplier’s books, ie discountsallowed, is carried out when using the method of PPD where a credit note is issued by the supplier.When accounting for discounts allowed using credit notes, a Discounts Allowed Day Book (DADB) is used to record creditnotes issued by the supplier for PPD and sent to the customer. The accounting system is shown on the following pages.A question and answer on this topic is also included.

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AMENDMENTS TO CHAPTER 7ACCOUNTING SYSTEM FOR DISCOUNTS RECEIVED

On the following pages we see how accounting for prompt payment discount (PPD) in the customer’s (buyer’s) books, iediscounts received, is carried out when using the method of PPD where a credit note is issued by the supplier.When accounting for discounts received using credit notes, a Discounts Received Day Book (DRDB) is used to recordcredit notes issued by the supplier for PPD and received by the customer. The accounting system is shown on the followingpages.A question and answer on this topic is also included.

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AMENDMENTS TO CHAPTERS 9 and 10CASH BOOK AND ANALYSED CASH BOOK CHANGES FOR DISCOUNTS ALLOWED AND DISCOUNTS RECEIVED

When accounting for discounts allowed and discounts received using credit notes, it is important to note that no entriesare recorded in cash book and analysed cash book. The cash book becomes a two-column cash book – with columns for ‘cash’ and ‘bank’ on both the debit and credit sides.No columns are shown for discounts allowed and discounts received in the cash books.Entries to discounts allowed account and discounts received account in the general ledger are made not from the cashbooks but from the totals of Discounts Allowed Day Book and Discounts Received Day Book.In Chapter 9, ignore the case study on pages 190 and 191; also the references to discounts allowed and discounts receivedon pages 193, 194 and 195.In Chapter 10, replace the case study of the analysed cash book and ledger transfers on pages 203 – 208 with the newcase study and ledger transfers on the following pages.

Changes to Chapter 9 questions9.3 ignore all references to discounts9.4 is deleted9.5 ignore all references to discounts

Changes to Chapter 9 answers9.3 ignore all references to discounts9.4 is deleted9.5 ignore all references to discounts

Changes to Chapter 10 questions10.3 delete part (c)10.4 ignore all references to discounts10.5 ignore all references to discounts

Changes to Chapter 10 answers10.3 delete part (c)10.4 ignore all references to discounts10.5 ignore all references to discounts

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