Accounting for Merchandising Business: Purchase Discounts Purchases Discounts

Purchase discounts are used in credit purchases by sellers to encourage buyers to pay before the credit period is over, as they reduce the total amount to be paid. According to Kieso, Weygandt and Warfield (2011), some companies consider purchase discounts as losses, and use the net method to account for them in financial statements to correctly report an asset and the liability that arises. Management can also use the net method to assess efficiency as discount offers that are not taken represent additional costs to the business. Small businesses benefit more from these discounts as they deal with numerous payables and receivables and when discounts are given to customers, journal entries are used to indicate the amounts debited and credited to each account. A discount is often expressed as x/10, n/30 means that the customer is offered x discount if they pay within 10 days - if this period passes, they should pay the full amount in 30 days. In the illustration given, each activity reported gives rise to different entries as shown:

a) She sold merchandise on account, $15,000 with terms 2/10, net 30. The cost of the merchandise sold was $7,500.00.

If merchandise worth...

The total cost of the goods sold increases by $7,500 which is debited, and a resultant credit entry of credit purchases that also increase with the same amount. The purchasing power of these businesses also increases significantly and more customers are attracted to the business as a result of improved goodwill.
b) She received payment minus the discount

This means that the discount reduced the total amount paid. A discount expressed as 2/10, n/30 means that the customer is offered a discount of 2% if they honor their obligation to make payment within 10 days, but if this period passes they should pay the full amount in 30 days (Warren, Reeve and Duchac, 2013). Cash received amounts to $14,700 calculated as 15000-(2%*15000). This, together with a discount of 300(2%*15000) is debited to the company's account. Since the accounts receivable decrease with the same amount, they are credited.

c) She purchased merchandise on account ($7,000) with terms of 2/10, net 30.

Merchandise that is purchased increases both inventory and purchases with an amount of $7,000, which…