Question

Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct?a. Gross approach.b. Net approach.c. Allowance approach.d. All three approaches are theoretically correct

Answer 1

Answer:

b. Net approach.

Explanation:

Among all the options Net approach is the one use to record cash discounts related to accounts receivable.  

Net approach is way to record purchases of inventory with cash discount. This method always assumes that the retailer always takes the advantage of the discounted prize and records the purchased inventory at the discounted price.

Answer 2

Answer:

The correct option is (b)

Explanation:

Under net approach of recording discount, accounts receivable is debited by the amount less discount offered for making early payment. If payment is not received within the discount period, then discount amount is credited as 'sales discount forfeited' and recorded as income in profit and loss account.

Net approach is theoretically correct as it reflects true assets, in this case accounts receivables, in the balance sheet. It means that amounts debited or credited reflects historical cost principle.