What is purchase discounts lost?

The account Purchase Discounts Lost is found in the general ledger of a company that records vendors' invoices using the net method. An amount is entered in Purchase Discounts Lost only when the company fails to pay an invoice within the vendor's discount period.

To illustrate the net method and Purchase Discounts Lost, let's assume that a retailer's policy is to always pay a vendor's legitimate invoice within its discount period if the invoice offers an early payment discount. Let's also assume that one vendor's invoice is for $1,000 and has terms of 2/10, net 30 days. After reviewing and approving the invoice, the retailer will debit Purchases (or Inventory) for $980 ($1,000 minus 2% discount) and will credit Accounts Payable for $980.

If the retailer pays the vendor $980 within the 10-day discount period, it will be recorded with a debit to Accounts Payable for $980 and a credit to Cash for $980. However, if the retailer fails to pay the invoice within the discount period, the retailer will need to remit $1,000 to the vendor. In that case the retailer will credit Cash for $1,000; debit Accounts Payable for $980; and debit Purchase Discounts Lost for $20. Purchase Discounts Lost is considered to be an expense (as opposed to being a cost of the goods). The cost of the goods remains at $980 (the cash price) because in accounting cost is defined as cash or the cash equivalent amount. The $20 is viewed as interest expense or a financing charge since the retailer was apparently unable to remit the cash price of $980 within the discount period.