Definition of Purchase Discount
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.)
Purchase Discounts is also a general ledger account used by a company purchasing
inventory goods and accounting for them under the periodic inventory system.
Example of Purchase Discount
Assume that a company receives a supplier's invoice of $5,000 with the credit
terms 2/10 net 30. The company will be allowed to subtract a purchase discount of
$100 (2% of $5,000) and remit $4,900 if the invoice is paid in 10 days. Otherwise, the
company must pay the full $5,000 within 30 days.
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.
Definition of Cash Discount
A cash discount is a deduction allowed by some sellers of goods or by some providers
of services in order to motivate customers to pay within a specified time. The cash
discount is also referred to as an early payment discount.
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.
Examples of a Cash Discount
Let's assume that a company offers a cash discount and it is printed on its sales
invoices as 1/10, net 30. Let's also assume that a sales invoice is for $1,000 and the
buyer has been authorized to return $100 of goods. Therefore, the net amount due to
the seller within 30 days is $900. However, the buyer may deduct $9 (1% of $900) if
the buyer pays the seller $891 within 10 days of the invoice date. The seller will
usually record the $9 cash discount with a debit to the account Sales Discounts. The
buyer will record the $9 savings as a credit to Purchase Discounts or as a reduction to
the cost recorded in inventory.
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.
Definition of Purchase Discount
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.)
Purchase Discounts is also a general ledger account used by a company purchasing
inventory goods and accounting for them under the periodic inventory system.
Example of Purchase Discount
Assume that a company receives a supplier's invoice of $5,000 with the credit
terms 2/10 net 30. The company will be allowed to subtract a purchase discount of
$100 (2% of $5,000) and remit $4,900 if the invoice is paid in 10 days. Otherwise, the
company must pay the full $5,000 within 30 days.
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.
Definition of Trade Discount
A trade discount is a routine reduction from the regular, established price of a product. The use of trade discounts
allows a company to vary the final price based on each customer's volume or status.
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.
Example of Trade Discounts
A distributor of merchandise may have a single catalog which displays a single price for each product. However, the
distributor allows a trade discount from the catalog price based on each customer's volume. For example, one
product may have a catalog price of $100. A casual buyer will be charged $100. However, a reseller will be given a
trade discount of 20% from the catalog price, and will be charged $80. Lastly, a registered high-volume wholesaler
will be given a trade discount of 27% and will be charged $73.
Recording Sales Having a Trade Discount
The company selling the product (and the buyer of the product) will record the transaction at the amount after the
trade discount is subtracted. For example, when goods with list prices totaling $1,000 are sold to a wholesaler that is
entitled to a 27% trade discount, both the seller and the buyer will record the transaction at $730. There will not be a
general ledger account entitled Trade Discount.
A purchase allowance is a reduction in the list price offered by a
manufacturer or distributor, in exchange for ordering a minimum quantity.
This allowance may also be granted to a customer in exchange for the buyer’s
retention of damaged or incorrect goods.
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 Discounts is also a general ledger account used by a company purchasing
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).inventory goods and accounting for them under the periodic
inventory system.
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).