Question

Discount is given to debtors to encourage _________.

• A. Discount
• B. Bad debts
• C. Prompt payments
• D. None of the Above

Answer 1

Answer: (C)

Prompt payments

A business enterprise allows discount on debtors to encourage prompt payments. Discount likely to be allowed to customers in an accounting year can be estimated and provided for by creating a provision for discount on debtors. Provision for discount is made on good debtors which are arrived at by deducting further bad debts and the provision for doubtful debts. The journal entry is recorded to create provision for discount on debtors:

Profit and Loss A/c Dr.

To Provision on Discount on Debtors A/c

As stated above, the provision for discount on debtors will be created only on good debtors.