Net purchases is used to describe the combination of the amounts recorded in the following general ledger temporary accounts: Purchases, Purchases Discounts, and Purchases Returns and Allowances. These accounts are used by companies having inventories of goods and which use the periodic inventory system in their general ledgers.
To illustrate the calculation of net purchases, let's assume that a company had the following activity:
- the account Purchases shows a debit balance of $250,000 which is the gross amount of its purchases of goods that were bought to resell
- the account Purchases Discount shows a credit balance of $3,000 resulting from vendors' early payment discounts
- the account Purchases Returns and Allowances has a credit balance of $9,000 resulting from vendors' credit memos
Based on the above activity the company's net purchases are $238,000 ($250,000 - $3,000 - $9,000).