Settlement Discounts

An early settlement discount is a percentage discount that is calculated automatically for customer or supplier accounts when invoices are paid within the specified settlement terms. For example, if the percentage discount is 2% and the terms is 7 days, then if an invoice is paid within 7 days, a discount of 2% is calculated off the invoice amount to be paid.

Discounts are only calculated when transactions are paid in full. You may choose to override the default discount calculation and not issue a calculated discount if you wish.

If you do not assign early settlement discounts to customer or supplier accounts you may still enter discounts against transactions manually. You can choose to have CAPITAL calculate early settlements automatically or you may choose to enter discounts manually. However, you cannot choose both methods with the same account.

To establish automatic settlement term discounts you must specify an Early Settlement discount percentage and Settlement Terms for each account. For more information on entering information into these fields see the topics: Customer Reference and Supplier Reference. Also consult the topics: Customer Transaction Reference and Supplier Transaction Reference.

Hints & Tips

If an early settlement discount was not issued on an account this is because:

The transaction may be outside the accepted settlement term period. Keep in mind that if you are entering payments into the computer on the day you receive them, rather than the date on the payment/cheque, you should make allowances for this by extending the allowable settlement period by a few days. (Adjust Settlement Terms under the customer/supplier's account.)
The customer may have underpaid the amount. CAPITAL only permits a 5c tolerance of error for settlement discounts. (As an experiment, trying increasing the payment amount by a few cents and see if the discount is then allowed. But don't proceed with totalling the payment.) If this is the case, and you still wish to allow the discount, enter the payment and discount into the system as separate transactions.

You can set the degree of discount error tolerance by adjusting the Allow Discount Within field found in INSTALLATION Workshop.

Settlement Discounts & Tax

When issuing early settlement payment discounts, CAPITAL will calculate a tax credit if you have assigned a tax rate to the field "Tax rate on customer discounts". This is found in INSTALLATION Workshop program under the Install menu, Taxes, GST & Sales Tax.

The tax rate assigned must be an inclusive type. (That is, the tax is calculated as a portion of the total of the settlement discount. The tax is not added on top of the settlement discount amount.)

If you will be issuing early settlement discounts it is strongly recommended that you create a tax rate code for these types of transactions in order to keep them separated from other types of tax charges and tax rates.

The tax credit on an early settlement discount is based on the percentage credited to the entire transaction being discounted. For example:

If you are paying a $110.00 invoice and issuing a 2.5% early settlement discount, then 2.5% of the tax applicable to that invoice will also be credited. If the tax amount is $10, the tax credit would be .25c. Thus the settlement discount will be $2.75 (2.5% of $110.00) and the tax credit: .25c. (2.5% of $10.00 tax).

It should be noted that 10% of $2.75 is .28c (rounded up). So it is important not to assume that 10% of the total of your settlement discount transactions will equal the tax credit. It may also be necessary for CAPITAL to consider tax free items, tax exempt transactions, and so forth, which would result in further adjustments to the tax credit that is finally calculated.

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