Gross Method of Recording Purchases

In Chapter 5, purchases of inventory on account were recorded using the net method. Under the
net method, an invoice is recorded net of any discounts for early payment. This appendix illus-
trates the gross method of recording purchases discounts and purchases returns and allowances.

Purchases Discounts
Under the gross method, an invoice with credit terms granting a discount for early payment is
recorded at the gross amount of the invoice. If the customer pays within the discount period, the
discount is recorded as a credit to Inventory, Cash is credited for the amount paid, and Accounts
Payable is credited for the invoice amount.
To illustrate, assume that NetSolutions uses the perpetual inventory system and orders merchan-
dise from Alpha Technologies on January 3, 20Y8. Alpha Technologies ships the merchandise and
bills NetSolutions for $3,000 on January 5, 20Y8, with credit terms of 2/10, n/30 (see Chapter 5,
Exhibit 4). The purchase would be recorded under the gross method as follows:

20Y8
Jan. 5 Inventory 3,000
Accounts Payable—Alpha Technologies 3,000

Assume that NetSolutions pays within the discount period on January 15. The payment would
be recorded as follows:

Jan. 15 Accounts Payable—Alpha Technologies 3,000

Cash 2,940
Inventory 60

Accounts Payable is debited for the invoice amount of $3,000. Cash is credited for the
amount paid of $2,940, which is the invoice amount of $3,000 less the purchases discount of $60
($3,000 × 2%). Inventory is credited (decreased) by the amount of the discount of $60.
Instead of paying within the discount period, assume that NetSolutions pays $3,000 on F
­ ebruary 4.
The payment would be recorded as follows:

Feb. 4 Accounts Payable—Alpha Technologies 3,000

Cash 3,000

Purchases Returns and Allowances

A buyer may request an allowance for merchandise that is returned (a purchases return) or a
price allowance for damaged or defective merchandise (purchases allowance). In this case, the
buyer debits Accounts Payable and credits Inventory for the invoice amount of the return or the
amount of the allowance.
To illustrate, assume the following data concerning a purchase of inventory by NetSolutions
in May:

May2. Purchased $5,000 of inventory from Delta Data Link, terms 2/10, n/30.
4. Returned $1,000 of the inventory purchased on May 2.
12. Paid for the purchase on May 2 less the return and discount.

1
2 Gross Method of Recording Purchases

NetSolutions would record these transactions as follows:

May2
Inventory 5,000
Accounts Payable—Delta Data Link 5,000
4 Accounts Payable—Delta Data Link 1,000
Inventory 1,000
12 Accounts Payable—Delta Data Link 4,000
Cash 3,920
Inventory 80

Comparison with the Net Method

The gross method and net method are both acceptable under generally accepted a­ccounting
principles (GAAP). Exhibit 1 shows a comparison of the gross and net methods using the
­
­NetSolutions sale of $3,000 illustrated earlier.

Exhibit 1
Gross Method Net Method
Gross Method Versus
Net Method Purchase:
Jan. 5 Inventory....................................................................................... 3,000 2,940
Accounts Payable—Alpha Technologies....................... 3,000 2,940

Discount Taken:
Jan. 15 Accounts Payable—Alpha Technologies............................. 3,000 2,940
Cash.......................................................................................... 2,940 2,940
Inventory................................................................................ 60

Discount Not Taken:

Feb. 4 Accounts Payable—Alpha Technologies............................. 3,000 2,940
Inventory....................................................................................... 60
Cash.......................................................................................... 3,000 3,000
 Gross Method of Recording Purchases 3

Exercises

EX 1  Gross method for purchases discounts

Segway Co. purchased merchandise on account for $15,000 from Kramer Supply Co. with credit
terms of 2/10, n/30. Using the gross method of recording purchases discounts, journalize Segway
Co.’s entries to record (a) the purchase, (b) the payment within the discount period, and (c) the
payment beyond the discount period of 10 days.

EX 2  Gross method for purchases discounts

Journalize the entries for the following transactions using the gross method of recording purchases
discounts:
Mar. 2. Purchased merchandise on account, $20,000, terms 1/10, n/30.
8. Purchased merchandise on account, $15,000, terms 2/10, n/30.
11. Paid for the purchase of March 2 less the discount.
20. Paid for the purchase of March 8.

EX 3   Gross and net methods for purchases discounts

The following selected transactions were completed by Long Inc. during August 20Y8:
Aug. 5. Purchased merchandise on account, $8,000, terms 2/10, n/30.
9. Purchased merchandise on account, $5,000, terms 1/10, n/30.
15. Paid for the purchase of August 5 less the discount.
25. Paid for the purchase of August 9.
a. Journalize the August transactions using the gross method of recording purchases discounts.
b. Journalize the August transactions using the net method of recording purchases discounts.
c. Assuming these were the only inventory purchases, what is the total value of inventory as of
August 25 under each method?

EX 4  Purchases returns and allowances

Using the gross method of recording purchases discounts, journalize the entries for the following
transactions completed by Hester Company during April 20Y2:
Apr. 5. Purchased merchandise on account, $50,000, terms 2/10, n/30.
9. Discovered that $8,000 of the merchandise purchased on April 5 was defective and returned the items,
receiving credit.
10. Purchased merchandise on account, $25,000, terms 1/10, n/30.
12. Returned $1,000 of the merchandise purchased on April 10, receiving credit.
15. Paid for the purchase of April 5 less the return and discount.
25. Paid for the purchase of April 10 less the return.