What is the net method of recording purchase discounts?
Net method of recording purchase discounts is a method of recording purchase discounts in which the purchase and accounts payable are recorded at the net of the allowable discount.
The net method of recording purchase discounts records the purchase and the accounts payable net of the allowable discount. If the payment is made within the discount period, Accounts Payable should be debited, and Cash should be credited for the amount at which the payable was originally recorded. If the firm does not pay within the discount period, the full invoice price is paid. The difference between the amount at which Accounts Payable is debited and Cash is credited is debited to an account titled Purchase Discounts Lost.
Journal entries to record purchase discounts under net method
$100 Purchase – Stated terms 2/10, n/30
This account is treated as either an operating expense or interest expense. The argument for treating discounts lost as interest expense is based on the fact that the firm consciously chose not to pay within the allowable discount period, thus causing an additional cost. This additional cost represents a cost for the use of money and therefore is considered interest.
As in the case of sales discounts, net method is preferable. Accounts payable are recorded at their expected cash payment at the time of purchase. Furthermore, the use of the account, Purchase Discounts Lost; highlights the total cost of not paying within the discount period. As we noted previously, this.can be a significant cost, and it is generally in the firm’s best interest to pay within the discount period.