Purchase Discount in Accounting

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• The Gross Method helps to provide accurate financial information by making sure payment amounts reflect reality, rather than showing inflated sales figures or artificially lowered expenses.
• Buyers must record shipping charges as transportation in (or freight in) when the goods were shipped FOB shipping point and they have received title to the merchandise.
• In addition the terms will often allow a purchase discount to be taken if the invoice is settled at an earlier date.
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Both methods provide the same result; however, the accounting journal entry is slightly different. Like the gross method of recording sales discounts, the gross method of recording purchase discounts is very common. In evaluating the gross and net methods, notice that the Purchase Discounts Lost account (used only with the net method) indicates the total amount of discounts missed during a particular period.

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A potentially significant inventory-related cost pertains to freight. The importance of considering this cost in any business transaction is critical. The globalization of commerce, rising energy costs, and the increasing use of overnight delivery via more expensive air transportation all contribute to high freight costs. As a result, business negotiations relate not only to matters of product cost, but must also include consideration of freight terms. This discount calculator lets you find the reduced price of a product and the amount of money you save.

The discount is recorded in a contra expense account which is offset against the appropriate purchases or expense account in the income statement. The business pays cash of 1,470 and records a purchase discount of 30 to clear the customers accounts payable account of 1,500. Getting purchase discounts allows retailers to offer sales discounts and thus, keep their customers satisfied. As mentioned earlier, in any business offering discounts is an integral part of their marketing and sales scheme.

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

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What is Discount Allowed and Discount Received?

Accounts payable is debited, and Cash is credited for $100, the full invoice price. Because of all the new income statement-related accounts that were introduced for the merchandising concern, it is helpful to revisit the closing process. Recall the objective of closing; to transfer the net income to retained earnings and to reset the income statement accounts to zero in preparation for the next accounting period. As a result, all income statement accounts with a credit balance must be debited and vice versa. Several items are highlighted in these journal entries and are discussed further in the next paragraph. A business should set up its accounting system to timely process, and take advantage of, all reasonable discounts.

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What is the impact of the gross method of recording purchase discounts on financial statements?

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If customers pay within 10 days from the date of purchase, they get a further $5 cash discount. Bike LTD purchases a bike from BMX LTD and pays within 10 days of the date of purchase. Cash discounts result in the reduction of purchase costs during the period. It is therefore necessary to record the initial purchase at the gross amount (after deducting any trade discounts though!) and subsequently decreasing purchases by the amount of discount that is actually received. Gross method of recording purchase discounts is the method in which the purchase and the payable are recorded at the gross amount, before any discount. Be aware that the income statement for a merchandising company may not present all of this detail.