Gross purchase method and net purchase method are two accounting strategies used to record the discounted sales price of goods sold on credit. Discounts are incentives to purchase products and reward customers for paying quickly. An example of a discount is 3/10, net 30, which means if payment in full is received within the first 10 days of the month a 3 percent discount will be given.
Goods sold on credit are recorded as accounts receivable on the date goods were transferred to the customer. Purchase discounts are offered by both retailers and wholesalers. Businesses using the gross purchase method record the gross sales price amount and later adjust the ledger if the customer pays in time to receive the discount. Businesses using the net purchase method record the discounted price initially, and adjust the record at the end of the month if payment is not received in time.
Net purchase method assumes customers will take advantage of discounts and pay for goods received by the specified time. This method provides quick feedback concerning the value of discounts in increasing sales. Net purchase discounts are designed to reduce the length of time credit sales are turned into cash profits. If customers do not pay accounts in full by the specified time, accounts receivable must be adjusted to reflect the gross sales price.
Gross purchase method records credit sales at the gross purchase price as if no discount was offered. Customers receive the discounted price if payment is made within the time specified on the invoice. Ledger entries for the gross purchase method do not provide accurate information on discounts customers did not take advantage of, and discounts not taken are referred to as lost discounts in ledger entries, which are viewed as compensation to vendors in return for extending credit.
Begin by recording the gross purchase price in the accounts receivable ledger. Invoices provided to customers will show the discount terms such as 2/10, net 30. If the invoice is paid in 10 days, an entry is made in accounts receivables labeled Purchase Discounts. Post the discount amount in the credit column, and make an entry explaining how the discount was applied. Under the purchase discount entry, post the cash received. The discount and cash received should equal the gross purchase price.
Kenneth Oster's leadership experience includes an Air Force career, pastoral leadership, and business ownership in the automotive repair industry. He has a MBA from Western Governors University, and is working toward a DBA degree from Northcentral University. Oster authored the book, "The Complete Guide to Preserving Meat, Fish and Game: Step-by-Step Instructions to Freezing, Canning, Curing and Smoking."