How to Record Payment of an Invoice with a Discount

What is the correct journal entry to record the payment of an invoice with a discount?

a) Debit Accounts Payable $4500; Credit Cash $4500

b) Debit Cash $4275; Credit Accounts Payable $225

c) Debit Accounts Payable $4275; Credit Cash $4275

d) Debit Cash $4500; Credit Accounts Payable $225

Answer:

The correct journal entry for paying an invoice with a discount is to debit Accounts Payable for the full invoice amount and credit Cash for the amount paid post-discount. The discount is credited to Accounts Payable or a Discounts account.

When a company like TNT Corp. pays an invoice in time to take a 5% discount, the correct journal entry to record this payment involves debiting Accounts Payable for the full invoice amount and crediting Cash for the discounted amount paid.

The calculation of the discount amount can be found by taking 5% of the original invoice amount. In this case, the $4500 invoice would result in a $225 discount. After deducting the discount, the actual payment amount becomes $4275.

Therefore, the journal entry to record the payment for the discounted invoice is as follows:

Debit Accounts Payable $4500;

Credit Cash $4275;

Credit Accounts Payable or Discount Taken $225.

This entry accurately reflects the reduction in the liability (Accounts Payable) and the cash amount actually paid by TNT Corp. after taking advantage of the discount.