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What is the net method?

In accounting and bookkeeping, the net method often refers to how a company records each vendor invoice. Under the net method, the company will credit Accounts Payable for the invoice amount minus any early payment discount that is offered. For example, if a vendor's invoice for $1,000 has credit terms of 2/10, net 30 days, the company will record the invoice at the net amount of $980 ($1,000 minus 2% of $1,000). In this example, Accounts Payable will be credited for $980 and another account (Inventory, Purchases, etc.) will be debited 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 on its balance sheet. It will also mean that the accounts and amounts recorded as debits will better reflect the historical cost principle.

If the company 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 will be 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.