Definition of Net Purchases
Net purchases is the term used for 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.
Examples of Net Purchases
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 as a result of the company earning early payment discounts that were offered by its vendors
- the account Purchases Returns and Allowances has a credit balance of $9,000 resulting from vendors' credit memos received by the company
Based on the above activity the company's net purchases are $238,000 ($250,000 - $3,000 - $9,000).