1. CHAPTER TWELVE APPENDIX THE NET-PRICE METHOD OF RECORDING PURCHASES

2. RECORDING PURCHASES  GROSS METHOD oPurchases are recorded at the gross amount oRegardless of available cash discounts  NET METHOD oPurchases are recorded at the net amount oAssuming all available cash discounts will be taken

3. COMPARING METHODS OF RECORDING PURCHASES Example: Purchased $100 of merchandise on account, with credit terms of 2/10, n/30

4. GROSS METHOD DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 Gross Method records the purchase as $100. The discount, if taken, will be recorded at the time of payment. 100 00 Accts Payable/Vendor 100 00 Purchased Merchandise on account

5. NET METHOD DATEDESCRIPTIONPRDEBITCREDIT Purchases 1 2 3 4 5 6 7 8 9 10 11 Net Method records the purchase at the net amount of $98. The assumption is made that ALL discounts will be taken. 98 00 Accts Payable/Vendor 98 00 Purchased Merchandise on account

6. COMPARING METHODS OF RECORDING PURCHASES Example: Payment is made within the discount period.

7. GROSS METHOD DATEDESCRIPTIONPRDEBITCREDIT Accts Payable/Vendor 1 2 3 4 5 6 7 8 9 10 11 The $2 discount is credited to Purchases Discounts. 100 00 Cash 98 00 Paid on account Purchase Discounts 2 00

8. NET METHOD DATEDESCRIPTIONPRDEBITCREDIT Accts Payable/Vendor 1 2 3 4 5 6 7 8 9 10 11 The $2 discount is not recorded. 98 00 Cash 98 00 Paid on account

9. COMPARING METHODS OF RECORDING PURCHASES Example: Payment is made AFTER the discount period.

10. GROSS METHOD DATEDESCRIPTIONPRDEBITCREDIT Accts Payable/Vendor 1 2 3 4 5 6 7 8 9 10 11 If the discount period is missed, no record is made of the discount. 100 00 Cash 100 00 Paid on account

11. NET METHOD DATEDESCRIPTIONPRDEBITCREDIT Accts Payable/Vendor 1 2 3 4 5 6 7 8 9 10 11 The $2 discount is recorded as “lost”. 98 00 Discounts Lost 2 00 Paid on account Cash 100 00

12. DISCOUNTS LOST DR. CR. + TEMPORARY OWNER’S EQUITY account used to record cash discounts lost on purchases. The balance represents a finance charge for postponing the payment.