Understanding Discounted Drafts and Contingent Liability
You can request an advance from the bank before the due date of the draft. This is called discounting a draft. When a draft is discounted, you can collect part or all of the money in advance. Some countries require businesses to recognize a contingent liability until the maturity date of the draft, as follows:
Before the due date of the draft, recognize the draft as cash and offset the amount as a contingent liability.
On the due date of the draft, close the contingent liability by processing the collection.
When you remit a draft with contingent liability, you can collect 100 percent of the draft before the due date.
You must complete the appropriate processing options for the Draft Remittance program (R03B672) to remit drafts with discounts and contingent liability.
When you post the draft remittance, the system creates journal entries for both discounted drafts and drafts that are discounted with contingent liability, as follows:
If the draft is remitted for discount without contingent liability, the system debits the Draft Remitted for Discount account, based on the AAI item RD3x(wherexis the payment instrument) and credits the drafts receivable account that you used.
When you collect the draft, the system debits a bank account (RB) and credits the Draft Remitted for Discount account (RD3x).
If the draft is remitted for discount with contingent liability, the system creates journal entries to do this:
Debit the Draft Remitted For Discount account, based on the AAI item RD3x (where x is the payment instrument) and credit the drafts receivable account that you used.
Debit the bank account and credit the Contingency Liability account, based on the AAI item RD4x (where x is the payment instrument).
When you collect the draft, the system debits the Contingency Liability account and credits the Draft Remitted for Discount account.
Do not confuse discounted drafts, which enable you to receive a cash advance from the bank, with discounted invoices.
You apply drafts to invoices with discounts and without discounts.
You remit drafts for the invoice amount and wait until the bank collects it from the customer, or you remit a discounted draft, which allows you to receive part of the payment in advance of the draft due date, or you remit a discounted draft and account for the contingent liability in the general ledger.