Question

Differentiate between the gross and net methods for accounting for purchase discounts.

Answer 1

Gross method of purchase records the gross amount or total invoice amount of purchase. The purchase discount is recorded in a separated account. The purchase discount is deducted from purchases like purchase returns.

For example for purchase of 10000 at 10% discount entry will be

Purchases. 10000

Account payable. 10000

If payment is made with discount period entry will be

Account payable. 10000

Discount on purchase. 1000

To cash. 9000

In case of net method of purchase , the purchase amount is recoreded at net amount after taking effect of discount.

Entry for purchase of 10000 at 10% discount will be

Purchase. 9000

Account payable. 9000