Accounting for Purchase Discounts: Net Method vs Gross Method

Tata Motors is offering significant discounts on its flagship SUVs, the Safari and the Harrier. The discount on the Safari can reach up to Rs 1.40 lakh, while the Harrier can be availed with up to Rs 1.20 lakh off, depending on the variant. The company purchase discount initiated the King of SUVs festival the previous month, marking the sale of its 2 million Tata SUV in India, a milestone that includes the classic Safari and the Sierra. After last month’s discounts, we now explore the offers available in August.

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In this section, we illustrate the journal entry for the purchase discounts for both net methods vs gross method under the periodic inventory system. However, in the net method, we record the purchase transaction at the net amount assuming that the payment would be made exactly on or before the agreed credit term. In this method, the amount of purchase recorded is the amount of invoice minus the cash discount. Accounting for purchase discounts, we can be recorded under either the net method or the gross method. Both methods provide the same result; however, the accounting journal entry is slightly different. In this journal entry, the purchase discounts is a temporary account which will be cleared to zero at the end of the period.

Purchase Discount Journal Entry

Under perpetual inventory system, the company can make the purchase discount journal entry by debiting accounts payable and crediting cash account and inventory account. The journal entry to account for purchase discounts is different between the net method vs the gross method. In the gross method, we record the purchase transaction at the original invoice amount while we record at the net of discount received under the net method. Determining the amount of a purchase discount requires careful consideration of the cost of the goods or services being purchased and the terms of the discount being offered. The two main types of purchase discounts are cash discounts and trade discounts.

Accounting For Purchase Discounts: Net Method Vs. Gross Method

After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. The most common method is the net method, but both methods have pros and cons. Ultimately, it’s up to you to decide which one makes the most sense for your business. Examining all aspects and looking at both the long-term results and short-term gains before deciding which course of action to take will provide the most clarity when it comes time to make a decision.

The Pure model provides a variable discount between Rs 70,000 and Rs 1.20 lakh, depending on the trim level. Meanwhile, the Adventure range also presents benefits ranging from Rs 50,000 to Rs 1.20 lakh. Look Tough-As in any big city crowd, try to look like you know what you’re doing.

• The journal entry for a purchase discount is recorded by debiting accounts payable and crediting both cash paid and purchase discount.
• An aspect that needs to be noted here is that only cash purchase discounts are included as subtractions from gross purchases.
• (For tips on haggling, check out Can I Haggle with New York City Street Vendors?) If you are purchasing multiple items, you can REALLY bring the prices down.
• The purpose of a business taking purchase discounts is to reduce its costs.

The discount is recorded in a contra expense account which is offset against the appropriate purchases or expense account in the income statement. Let’s assume that the supplier gives companies that purchase a high volume of goods a trade discount of 30%. If a high volume company purchases $40,000 of goods, its cost will be $28,000 ($40,000 X 70%). To comply with the cost principle the company will debit Purchases (or Inventory) for $28,000 and will credit Accounts Payable for $28,000. In order to illustrate precisely accounting for purchase discounts, let’s assume that ABC Co purchases merchandise inventory from its supplier on November 02, 20X1 at the original invoice amount of $1,500. Under perpetual inventory system, the company does not have a purchase account nor a purchase discount account.

The two methods of accounting for purchase discounts – the net method and the gross method

Examples of Entries for Goods Purchased at a Discount

• This is because the amount of accounts payable that the company needs to make payment to the supplier under both methods is at the same amount.
• However, under the net method, we need to record adjusting entries to recognize the loss of the discount.
• Purchase Discounts is also a general ledger account used by a company purchasing inventory goods and accounting for them under the periodic inventory system.
• It is important to note that while discounts can be beneficial, they should be monitored and managed carefully to ensure they are not having a negative effect on profits.
• As an example of a purchase discount, a seller offers its customers 2% off the invoiced price if payment is made within 10 days of the invoice date.
• A buyer debits Accounts Payable if the original purchase was made on credit and the payment has not yet been made to a seller.
• Also a general ledger account in which the purchase discounts are recorded under the periodicinventory method.