What is the gross method of recording purchase discounts?
Gross method of recording purchase discounts is the method in which the purchase and the payable are recorded at the gross amount, before any discount.
The gross method of recording purchase discounts records the purchase and the payable at the gross amount before any discount. If the firm takes the discount, an account titled Purchase Discounts will be credited for the amount of the discount. This account is eventually closed into Cost of Goods Sold at the time and adjusting entry is made to compute the cost of goods sold. The result is to reduce cost of goods sold by the amount of the discount taken.
Journal entries to record purchase discounts under gross method
$100 purchase – Stated terms 2 / 10, n / 30
* This illustration assumes the uses of the periodic inventory system. If a perpetual inventory system is used, the debit is to the Merchandise Inventory Account in all places where Purchases Account is debited. All other aspects of the entry are the same.
If the business fails to take the discount, the entry to record the payment will be straight forward. Accounts payable is debited, and Cash is credited for $100, the full invoice price. Like the gross method of recording sales discounts, the gross method of recording purchase discounts is very common. However, it also suffers from the same criticism made against recording sales at the gross amount when discounts are offered.