Net and Gross Method of Recording Purchases
Net and Gross Method of Recording Purchases
Purchase Discounts
It is a contra-expense account which is an offer from the supplier to the purchaser, to reduce the selling price if the payment is made within a certain period of time. It is subtracted from the purchases on the income statement. Sellers frequently call them sales discounts.
Methods of Recording
In accounting, gross method and net method are used to record these kinds of transactions.
Net Recording Method
Under the net method, purchase discounts are realized right away and the journal entries are made by recording accounts payable at the amount that will be paid after deducting any discount that is available for paying within the discount period or recording purchases at the net amount i.e. the total invoice amount minus any available discount, assuming that all available discounts will be taken. If the payments are not made in time or after the discount period, an anti-revenue or expense account named purchase discounts lost is debited to record the lost and if the discount is availed, the journal entry is to debit accounts payable for the net amount and credit cash.
To illustrate, assume a $1,000 purchase on terms of 2/10, n/60. The journal entry for the purchase is as follows:
Purchases………………………………………………………………………………………………………………….980
------------------------------------------------- Accounts Payable……………………………………………………………………………………………………….980
If the payment is made within the discount period the entry would be:
Accounts Payable……………………………………………………………………………………………………….980
-------------------------------------------------
Cash…………………..……………………………………………………………………………………………………….980
If payment is made after 10 days the journal entry to record payment after the discount period is:
Accounts Payable…………………………………………………………………………………………………..….980
Purchase Discounts Lost………………………………………………………………………………………………20
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Purchase Discounts
It is a contra-expense account which is an offer from the supplier to the purchaser, to reduce the selling price if the payment is made within a certain period of time. It is subtracted from the purchases on the income statement. Sellers frequently call them sales discounts.
Methods of Recording
In accounting, gross method and net method are used to record these kinds of transactions.
Net Recording Method
Under the net method, purchase discounts are realized right away and the journal entries are made by recording accounts payable at the amount that will be paid after deducting any discount that is available for paying within the discount period or recording purchases at the net amount i.e. the total invoice amount minus any available discount, assuming that all available discounts will be taken. If the payments are not made in time or after the discount period, an anti-revenue or expense account named purchase discounts lost is debited to record the lost and if the discount is availed, the journal entry is to debit accounts payable for the net amount and credit cash.
To illustrate, assume a $1,000 purchase on terms of 2/10, n/60. The journal entry for the purchase is as follows:
Purchases………………………………………………………………………………………………………………….980
------------------------------------------------- Accounts Payable……………………………………………………………………………………………………….980
If the payment is made within the discount period the entry would be:
Accounts Payable……………………………………………………………………………………………………….980
-------------------------------------------------
Cash…………………..……………………………………………………………………………………………………….980
If payment is made after 10 days the journal entry to record payment after the discount period is:
Accounts Payable…………………………………………………………………………………………………..….980
Purchase Discounts Lost………………………………………………………………………………………………20
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