Course Outline
Join PRO

What is the net method?

Author:
Harold Averkamp, CPA, MBA

Definition of Net Method

In accounting, the net method likely refers to the way a company records each vendor’s invoice that offers an early payment discount.

Example of Net Method

Assume that a company purchased $1,000 of goods on credit. The vendor’s invoice shows the amount of $1,000 along with credit terms of 2/10, net 30 days. This means the $1,000 is due within 30 days, but if the company pays the invoice within 10 days, only $980 needs to be paid. ($980 is the “net” of the $1,000 invoice amount minus the early payment discount of $20, which is 2% of $1,000.)

Companies that use the net method will record the vendor’s invoice as follows: credit Accounts Payable for $980 and debit another account (Inventory, Purchases, etc.) for $980.

If the company’s policy is to pay all vendor invoices within the discount period, the net method will result in a more precise current liability amount on its balance sheet. It also means that the accounts and amounts recorded as debits will better reflect the historical cost principle.

If a company uses the net method, but fails to remit the net amount within the discount period, the net method requires a debit entry to the expense Purchase Discounts Lost. In our example, if the company pays the invoice in 30 days, it is not entitled to the early payment discount and will therefore have to credit Cash for $1,000. The debit amounts include Accounts Payable for $980 and Purchase Discounts Lost for $20. Any amount recorded in Purchase Discounts Lost informs management that its policy of paying within the discount period has been violated.

Although the net method is theoretically better, it seems to be less efficient than recording vendor invoices at their stated amounts.

Join PRO to Track Progress
Must-Watch Video

Learn How to Advance Your Accounting and Bookkeeping Career

  • Perform better at your current job
  • Refresh your skills to re-enter the workforce
  • Pass your accounting class
  • Understand your small business finances
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus