Under a periodic inventory system, the purchase discount on merchandise purchased is credited to the general ledger account Purchase Discounts. The credit balance in this account (along with the credit balance in the Purchase Returns and Allowances account) will be deducted from the debit balance in the Purchases account in calculating the amount of net purchases.
A purchase discount of 2% for paying 20 days early (paying in 10 days instead of 30 days) equates to an annual rate of 36%. A purchase discount of 1% for paying 20 days early means an annual rate of 18%.
While the buyer refers to this as a purchase discount, the seller will refer to it as a sales discount. The discount is also known as an early-payment discount or a cash discount.
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