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Another contra account, Purchase discounts, accumulates reductions in the purchase price of merchandize if payment is made within a time period specified in the supplier’s invoice. Recall that if amount owing on the vehicle is paid within 15 days, the supplier’s terms entitle Excel to deduct $17 [($2,000 - 300) = $1,700 x 1% = $17].
Under the periodic inventory system, the $1,683 cash payment to the supplier on May 9 is recorded as follows:
The discount of $17 is deducted when calculating cost of goods sold on the income statement.
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