Purchase discount is an offer from the supplier to the purchaser, to reduce the payment amount if the payment is made within a certain period of time. For example, a purchaser bought 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 In accounting, gross method and net method are used to record transactions of this kind. 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 loss. Show References[edit]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 The first section of an income statement reports a company’s sales revenue, purchase discounts, sales returns and cost of goods sold. This information directly affects a company’s gross and operating profit. A purchase discount is a small percentage discount a company offers to a buyer to induce early payment of goods sold on account. DefinedCompanies make credit sales to increase sales revenue without requiring immediate cash payment. This allows more consumers to purchase goods using the seller as a short-term financing option. When the seller sends out a bill for goods sold on account, it may include a purchase discount listed as "1/10 Net 30." This means a buyer can earn a 10 percent discount by paying the bill within 10 days of receipt of the invoice. EntriesAccountants must make specific journal entries to record purchase discounts. When a buyer pays the bill within the discount period, accountants debit cash and credit accounts receivable. Another part of the entry debits purchase discounts and credits accounts receivable for the discount taken by the buyer. If the buyer does not take the discount, then accountants do not make the second entry. They simply debit cash and credit accounts receivable for the full amount. ReportingPurchase discounts is a contra revenue account. Revenue accounts carry a natural credit balance; purchase discounts has a debit balance as a contra account. On the income statement, purchase discounts goes just below the sales revenue account. The difference between the two results in net sales revenue. Accounts receivable is a current asset included on the company’s balance sheet. ConsiderationsWhen offering purchase discounts, companies must ensure they do not offer discounts that severely reduce their sales revenue. Too many discounts or extremely high discount percentages can reduce the company’s revenue and profit. A review of the company’s customers may also be necessary to determine which purchasers receive the discount. Offering the discount to select customers can improve the relationship between the company and those customers. What is Discount Allowed and Discount Received?A discount allowed is when the seller of goods or services grants a payment discount to a buyer. This discount is frequently an early payment discount on credit sales, but it can also be for other reasons, such as a discount for paying cash up front, or for buying in high volume, or for buying during a promotion period when goods or services are offered at a reduced price. It may also apply to discounted purchases of specific goods that the seller is trying to eliminate from stock, perhaps to make way for new models. A discount received is the reverse situation, where the buyer of goods or services is granted a discount by the seller. The examples just noted for a discount allowed also apply to a discount received. Accounting for the Discount Allowed and Discount ReceivedWhen the seller allows a discount, this is recorded as a reduction of revenues, and is typically a debit to a contra revenue account. For example, the seller allows a $50 discount from the billed price of $1,000 in services that it has provided to a customer. The entry to record the receipt of cash from the customer is a debit of $950 to the cash account, a debit of $50 to the sales discount contra revenue account, and a $1,000 credit to the accounts receivable account. Thus, the net effect of the transaction is to reduce the amount of gross sales. When the buyer receives a discount, this is recorded as a reduction in the expense (or asset) associated with the purchase, or in a separate account that tracks discounts. To continue with the last example from the perspective of the buyer, the buyer debits the accounts payable account for $1,000, credits the cash account for $950, and credits the early payment discounts account for $50. In many cases, it is easier not to recognize a discount received, if the resulting information is not used. Is a purchase discount an asset?When the buyer receives a discount, this is recorded as a reduction in the expense (or asset) associated with the purchase, or in a separate account that tracks discounts.
What is purchase discount expense?A purchase discount is a deduction that a payer can take from an invoice amount if payment is made by a certain date. This discount is used when a seller needs to accelerate the inflow of cash.
Are purchase discounts income?All discounts, allowances, and refunds of expenses are reductions in the cost of goods or services purchased and are not income. If they are received in the same accounting period in which the purchases were made or expenses were incurred, they will reduce the purchases or expenses of that period.
Where does purchase discount belong?On the income statement, purchase discounts goes just below the sales revenue account. The difference between the two results in net sales revenue. Accounts receivable is a current asset included on the company's balance sheet.
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