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A purchase discount is a deduction that a company may receive if the supplier offers
it and the company pays the supplier's invoice within a specified period of time. The
purchase discount is also known as a cash discount or early-payment discount. (A
supplier offering the discount will record the discounts taken by its customers in the
account Sales Discounts.)
If a company purchases office equipment for $20,000 and the invoice has credit terms
of 1/10, net 30, the company can deduct $200 (1% of $20,000) and remit $19,800 if
the invoice is paid within 10 days. If that occurs, the company will record the
equipment at its cost of $19,800.
The sellers and providers offering a cash discount will refer to it as a sales discount,
while the buyer will refer to the same discount as a purchase discount.
My dentist offers a 5% cash discount if the dental fee is paid on the day of the service.
This discount is offered to avoid the expenses of billing, mailing statements for
unpaid amounts, processing partial payments, not collecting amounts owed, etc. The
dentist and others accept credit card payments and pay a fee to a credit card processor
in order to avoid similar expenses.
If a company purchases office equipment for $20,000 and the invoice has credit terms
of 1/10, net 30, the company can deduct $200 (1% of $20,000) and remit $19,800 if
the invoice is paid within 10 days. If that occurs, the company will record the
equipment at its cost of $19,800.
Note that trade discounts are different from early-payment discounts. (Early-payment discounts of 1% or 2% are
usually recorded by the seller in an account such as Sales Discounts and by the buyer using the periodic inventory
method in an account such as Purchase Discounts.) Trade discounts are not recorded in a separate account by
either the seller or the buyer.
Purchase returns and allowances are subtracted from purchases to calculate the amount of net
purchases for a period. The specific calculation of net purchases will be demonstrated after a few
more concepts are introduced. Recall the previous discussion of cash discounts (sometimes called
purchase discounts from the purchaser’s perspective).
Purchase returns and allowances are subtracted from purchases to calculate the amount of net
purchases for a period. The specific calculation of net purchases will be demonstrated after a few
more concepts are introduced. Recall the previous discussion of cash discounts (sometimes called
purchase discounts from the purchaser’s perspective).