What is a purchase discount?

Definition of Purchase Discount

A purchase discount is a deduction that a company may receive if the supplier offers it and the company pays the supplier's invoice within a specified period of time. The purchase discount is also known as a cash discount or early-payment discount. (A supplier offering the discount will record the discounts taken by its customers in the account Sales Discounts.)

Purchase Discounts is also a general ledger account used by a company purchasing inventory goods and accounting for them under the periodic inventory system.

Example of Purchase Discount

Assume that a company receives a supplier's invoice of $5,000 with the credit terms 2/10 net 30. The company will be allowed to subtract a purchase discount of $100 (2% of $5,000) and remit $4,900 if the invoice is paid in 10 days. Otherwise, the company must pay the full $5,000 within 30 days.

If a company purchases office equipment for $20,000 and the invoice has credit terms of 1/10, net 30, the company can deduct $200 (1% of $20,000) and remit $19,800 if the invoice is paid within 10 days. If that occurs, the company will record the equipment at its cost of $19,800.

Free Debits and Credits Cheat Sheet

354,177
Subscribers
You are already subscribed. This offer is not available to existing subscribers.
Error: You have unsubscribed from this list.
Step 2: Please check your email.