Definition of Net Purchases
Net purchases refers to the combination of the amounts found in the following general ledger temporary accounts:
- Purchases (gross amount for goods purchased)
- Purchases Discounts (early payment discounts for paying some vendors' invoices in 10 days instead of 30 days)
- Purchases Returns and Allowances (credit memos received for returning goods to vendors or for other conditions)
These accounts are used by a company that purchases goods for resale and uses the periodic inventory system in its general ledger.
Example of Net Purchases
To illustrate the calculation of net purchases, assume that a company had the following general ledger account balances at the end of its accounting year:
- Purchases had a debit balance of $250,000
- Purchases Discount had a credit balance of $3,000
- Purchases Returns and Allowances had a credit balance of $9,000
Based on the above general ledger account balances, the company's net purchases for the year were $238,000 ($250,000 - $3,000 - $9,000).