Which type of expense would be classified as an allowance given for early payment?

An allowance given for early payment is classified as a discount allowed. This type of expense represents a reduction in the amount owed by customers who pay their invoices ahead of the due date. The purpose of offering a discount for early payment is to encourage prompt payment, improving cash flow for the business.

Discount allowed is recorded as an expense on the income statement because it reduces the total revenue the business recognizes from sales. It reflects a cost associated with incentivizing timely payments from customers, thus cultivating quicker cash inflows.

In this context, the other options do not fit the criteria for early payment discounts. Bad debts pertain to amounts that are deemed uncollectible, donations involve giving money or goods without expecting anything in return, and bank fees are charges incurred for operating business accounts or transactions. Only discount allowed directly relates to an adjustment in sales revenue due to customer payment behavior.