Settlement discounts

Settlement discount can be applied to sales orders to offer a discount to customers who pay within agreed payment terms.

What is a settlement discount?

A settlement discount (or prompt payment discount) is a discount offered to a customer to encourage them to pay invoices early. If paid within a certain period of time, the customer will get a discount on the total of the invoice. This has benefits for both parties - the customer gets a discount, and the business offering the discount gets money early, resulting in better cash flow.

Since April 1 2015, VAT must be calculated considering the actual amount paid.

How to issue a settlement discount

Typically, an invoice will be issued for the full, undiscounted amount, and if the settlement discount is taken up a credit note will be issued for the discount.

The terms and discount percentage being offered must be clearly displayed on the issued invoice. This can be done by editing the invoice template used when sending the invoice to the customer. Learn more about customizing templates.

If the customer does not take up the discount, the order will proceed as normal. However if they take the discount up, a credit note will have to be issued to clear the balance and correct the accounting.

So the steps are:

  1. Invoice the customer's sales order, sending them an invoice stating the terms of the settlement discount being offered. Learn more about invoicing.
  2. Record the payment for the invoice once it's received. If the settlement discount was taken, the order will look underpaid. Learn more about payments.
  3. Raise a credit note for the amount of the settlement discount. Learn more about credits.
  4. Allocate the credit to the invoice. Learn more about allocating account balances.


Say a business issues an invoice to a customer for £1,200 offering a settlement discount of 5% if paid within 7 days.

The invoice may look something like this:


The customer pays within 7 days of the invoice date, taking up the settlement discount. They pay 95% of £1,200, which comes out to £1,140. When that is recorded against the order, the order will look underpaid:


And the customer's account will display a balance:


To clear the invoice and create the correct accounting, raise a credit note. It can be a quick credit, or a credit created under Sales > New credit note.

The total amount of the credit must include VAT, so make sure to enter the amount inclusive of VAT!

You may also wish to enter the credit note to a specific nominal code for discounts.

Here, the credit is £60 in total, of which £50 is net, and £10 is VAT.

On the payment allocation screen, allocate the credit to the invoice:


This will clear the account balance and clear the invoice (and credit).

Accounting for settlement discounts

Using the above method, the following entries will be posted:

On invoicing

Account Debit Credit
1100 Accounts receivable (Debtors control account) 1200 0
4000 Sales 0 1000
2200 Sales tax control account 0 200

On payment

Account Debit Credit
1200 Bank 1140 0
1100 Accounts receivable (Debtors control account) 0 1140

On issuing the credit note

Account Debit Credit
4000 Sales discounts 50 0
2200 Sales tax control account 10 0
1100 Accounts receivable (Debtors control account) 0 60
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