Businesses incur expenses called either cost of services, cost of goods manufactured, or cost of goods sold in order to acquire goods. Such expenses can include purchase costs paid to suppliers, raw material costs for materials used in manufacturing, and the cost of direct labor. Purchases is an account that represents the sums spent to purchase completed units of the product from the business's suppliers. Net purchases is equal to gross purchases minus relevant deductions such as purchase returns, allowances and discounts.
Calculate gross purchases as being the number of units purchased multiplied by the price at which those units were purchased. For example, if a business purchased 100 units at $20 per unit, that business has spent $2,000 on gross purchases.
Calculate purchases returned to suppliers as being the number of units purchased and then returned multiplied by the price at which those units were purchased. For example, if the above business returned 20 of the 100 units it had purchased, it has incurred $400 in purchase returns.
Calculate purchase allowances and discounts as being the number of units purchased that were discounted or had allowances in price multiplied by the discount or allowance. For example, if 40 of the 100 units that the business had purchased were bought at a $5 discount, the business has incurred $200 in purchase discounts.
Deduct purchases returned, purchases allowances and discounts from gross purchases to calculate net purchases. Completing the example, the business deducts the $400 in purchase returns and $200 in purchase discounts from its gross purchases to calculate its net purchases of $1,400.
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