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CHAPTER TWELVE APPENDIX

Learn about the differences between gross and net methods of recording purchases and how discounts impact accounting entries. Explore examples illustrating payment periods and discounts lost scenarios.

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CHAPTER TWELVE APPENDIX

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  1. CHAPTER TWELVE APPENDIX THE NET-PRICE METHOD OF RECORDING PURCHASES

  2. GROSS METHOD Purchases are recorded at the gross amount Regardless of available cash discounts NET METHOD Purchases are recorded at the net amount Assuming all available cash discounts will be taken RECORDING PURCHASES

  3. COMPARING METHODS OF RECORDING PURCHASES Example: Purchased $100 of merchandise on account, with credit terms of 2/10, n/30

  4. GROSS METHOD DATE DESCRIPTION DEBIT PR CREDIT Purchases 100 00 1 Accts Payable/Vendor 2 100 00 3 Purchased Merchandise 4 on account 5 Gross Method records the purchase as $100. The discount, if taken, will be recorded at the time of payment. 6 7 8 9 10 11

  5. NET METHOD DATE DESCRIPTION DEBIT PR CREDIT Purchases 98 00 1 Accts Payable/Vendor 2 98 00 3 Purchased Merchandise 4 on account 5 Net Method records the purchase at the net amount of $98. The assumption is made that ALL discounts will be taken. 6 7 8 9 10 11

  6. COMPARING METHODS OF RECORDING PURCHASES Example: Payment is made within the discount period.

  7. GROSS METHOD DATE DESCRIPTION DEBIT PR CREDIT Accts Payable/Vendor 100 00 1 Cash 2 98 00 3 Purchase Discounts 2 00 4 Paid on account 5 The $2 discount is credited to Purchases Discounts. 6 7 8 9 10 11

  8. NET METHOD DATE DESCRIPTION DEBIT PR CREDIT Accts Payable/Vendor 98 00 1 Cash 2 98 00 3 Paid on account 4 The $2 discount is not recorded. 5 6 7 8 9 10 11

  9. COMPARING METHODS OF RECORDING PURCHASES Example: Payment is made AFTER the discount period.

  10. GROSS METHOD DATE DESCRIPTION DEBIT PR CREDIT Accts Payable/Vendor 100 00 1 Cash 2 100 00 3 Paid on account 4 5 If the discount period is missed, no record is made of the discount. 6 7 8 9 10 11

  11. NET METHOD DATE DESCRIPTION DEBIT PR CREDIT Accts Payable/Vendor 98 00 1 Discounts Lost 2 2 00 3 Cash 100 00 4 Paid on account 5 The $2 discount is recorded as “lost”. 6 7 8 9 10 11

  12. DISCOUNTS LOST TEMPORARY OWNER’S EQUITY account used to record cash discounts lost on purchases. DISCOUNTS LOST CR. DR.  The balance represents a finance charge for postponing the payment.

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