Wize University Introduction to Financial Accounting Textbook > Merchandising
Purchase Discounts - Perpetual Inventory
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Purchase Discounts (Perpetual)
Purchase discounts are given to buyers when they pay all or part of their outstanding balance within the supplier's discount window.
Credit Terms
- Net: Tells the buyer how long they have to pay for their purchase.
- Discount percentage and discount period
Purchase Discount
- Recorded only if discount is received
- Reduces cost of inventory
- Partial discounts are possible
- If buyer only pays a portion of balance, that portion is given the discount.
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Example: Purchase Discounts (Perpetual)
Prepare the journal entry to record the transaction on May 24th and May 31st.
May 17th: Purchased 400 units for $20 each under the terms 2/10, net/30.
May 24th: Paid supplier for half of the outstanding balance.
May 31st: Paid supplier for remaining balance
Practice: Purchase Discounts (Perpetual)
ABC Inc. is a furniture retailer in Seattle, management needs your help to prepare its journal entries for the year before preparing its financial statements. The following events took place during January 2020.
Jan 1: Began the year with $60,000 in inventory.
Jan 7: Purchased 100 units for $120 each from Supplier A on account. The terms were 2/10, n/45 and FOB shipping point.
Jan 9: Supplier A shipped the goods, the cost of the shipping was $500.
Jan 10: Received the goods from Supplier A.
Jan 13: Returned 5 defective units to Supplier A.
Jan 17: Paid entire balance to Supplier A.
Jan 18: Purchased 200 units for $90 each from Supplier B on account. The terms were 1/5, n/60 and FOB destination.
Jan 20: Supplier B shipped the goods, the cost of the shipping was $300.
Jan 22: Received the goods from Supplier B.
Jan 30: Paid balance in full to Supplier B.
Jan 31: Returned 1 defective unit to Supplier A.
Prepare the journal entry to record the transaction on January 17. Using the perpetual inventory system.
Transactions:
| Account | Debit | Credit |
|---|---|---|