Purchase discounts affect the purchase price of merchandize if payment is made within a time period specified in the supplier’s invoice. For example, if the terms on the $2,000 invoice for one vehicle received by Excel indicates “1/15, n45”, this means that the $2,000 must be paid within 45 days (‘n’ = net). However, if cash payment is made by Excel within 15 days, the purchase price will be reduced by 1%.
Assuming the amount is paid within 15 days, the supplier’s terms entitle Excel to deduct $17 [($2,000 - $300) = $1,700 x 1% = $17]. The payment to the supplier if payment was made on May 9 would be recorded as:
The cost of the vehicle in Excel’s inventory records is now $1,683 ($2,000 – 300 – 17). If payment is made after the discount period, $2,700 of cash is paid and the entry would be:
In this case, the Merchandize Inventory account is not affected. The cost of the vehicle in the general ledger remains at $1,700.
Trade discounts are similar to purchase discounts. A supplier advertizes a list price which is the normal selling price of its goods to merchandizers. Trade discounts are given by suppliers to merchandizers that buy a large quantity of goods. For instance, assume a supplier offers a 10% trade discount on purchases of 1,000 units or more where the list price is $1/unit. If Beta Merchandizer Corp. buys 1,000 units on account, the entry in Beta’s records would be:
Note that just the net amount (list price less trade discount) is recorded.
- 1773 reads
