Which of the following conditions best represents the net effect of discount allowed on credit sales on the accounts of a business?
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Correct Answer: Option A
Explanation:
When a discount is allowed on credit sales, it is an incentive given to customers (debtors) for early payment. This affects the accounting records as follow:
- It reduces the amount owed by the customer (debtor).
- Therefore, it reduces the closing balance of the sales ledger control account, which summarizes amounts due from all debtors.
- It is treated as an expense in the profit and loss account, which reduces net profit, not increases it.
When a discount is allowed on credit sales, it is an incentive given to customers (debtors) for early payment. This affects the accounting records as follow:
- It reduces the amount owed by the customer (debtor).
- Therefore, it reduces the closing balance of the sales ledger control account, which summarizes amounts due from all debtors.
- It is treated as an expense in the profit and loss account, which reduces net profit, not increases it.