Periodic Inventory - Purchase Discounts: Videos & Practice Problems

A purchase discount in a periodic inventory system is a reduction in the amount owed to a supplier if payment is made within a specified period. This is typically noted as something like 2/10, n/30, where '2' represents a 2% discount if the invoice is paid within 10 days, and 'n/30' means the net amount is due within 30 days. The purchase discounts account is a contra asset account that reduces the value of inventory. For example, if a company buys $1800 worth of goods and pays within the discount period, they save $54, paying $1746 instead.

In a periodic inventory system, purchase discounts are recorded using a contra asset account called 'purchase discounts.' When goods are purchased, the entry is a debit to the purchases account and a credit to accounts payable. If the payment is made within the discount period, the entry to record the payment includes a debit to accounts payable for the full amount, a credit to cash for the discounted amount, and a credit to purchase discounts for the discount received. This reduces the value of the inventory and ensures the accounting equation remains balanced.

The notation 2/10, n/30 in purchase discounts means that a 2% discount is available if the invoice is paid within 10 days. The 'n/30' part indicates that the net amount is due within 30 days. For example, if a company purchases goods worth $1000, they can pay $980 (after a 2% discount) if they pay within 10 days. If they pay after 10 days but within 30 days, they must pay the full $1000.

In a periodic inventory system, purchase discounts reduce the value of inventory. The purchase discounts account is a contra asset account that lowers the inventory's recorded value. For example, if a company buys $1800 worth of goods and qualifies for a $54 discount by paying early, the inventory's value is reduced by $54. This is recorded by crediting the purchase discounts account, which offsets the inventory's value, ensuring accurate financial reporting.

The purchase discounts account is considered a contra asset account because it reduces the value of an asset, specifically inventory. In a periodic inventory system, when a company takes advantage of a purchase discount, the amount of the discount is credited to the purchase discounts account. This credit reduces the total value of the inventory recorded on the balance sheet, reflecting the actual cost paid for the inventory after the discount.