A sole trader allows a customer a discount for settling an account promptly. How is the discount allowed treated in the financial statements?
Correct answer: C. It is recorded as an expense
- A. It is added to sales revenue
- B. It is deducted from purchases
- C. It is recorded as an expense
- D. It is deducted from capital
Explanation
Discount allowed is a cost incurred to obtain prompt payment from a customer, so it is charged as an expense in the income statement. It is not a reduction of purchases or a personal deduction from capital.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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