Purchase Discount

Purchase Discount 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. For example, a purchaser brought a $100 item, with a purchase discount term 3/10, net 30. If he pays within 10 days, he will only need to pay $97. If he pays half the amount within 10 days and the rest later, he will need to pay $48.50 during the first payment and $50 during the second payment. Either way, the amount need to be fully paid within 30 days.

In accounting, gross method and net method are used to record these kind of transactions. Under the gross method, the total cost of purchases are credited to accounts payable first, and discounts realized later if the payments were made in time. Under the net method, purchase discounts are realized right away. And if the payments are not made in time, an anti-revenue account name Purchase Discounts Lost is debited to record the lost.

References

1. Intermediate Accounting 8th Canadian Edition, page 439, Kieso, Weygandt, Warfield, Young, Wiecek, John Wiley & Sons Canada, Ltd, 2007, ISBN 978-0-470-83979-9


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