Accounting for Merchandising Business: Purchase Discounts
Purchases Discounts
Purchase discounts are used in credit purchases by sellers to encourage buyers to pay before the credit period is over, as they reduce the total amount to be paid. According to Kieso, Weygandt and Warfield (2011), some companies consider purchase discounts as losses, and use the net method to account for them in financial statements to correctly report an asset and the liability that arises. Management can also use the net method to assess efficiency as discount offers that are not taken represent additional costs to the business. Small businesses benefit more from these discounts as they deal with numerous payables and receivables and when discounts are given to customers, journal entries are used to indicate the amounts debited and credited to each account. A discount is often expressed as x/10, n/30 means that the customer is offered x discount if they pay within 10 days - if this period passes, they should pay the full amount in 30 days. In the illustration given, each activity reported gives rise to different entries as shown:
a) She sold merchandise on account, $15,000 with terms 2/10, net 30. The cost of the merchandise sold was $7,500.00.
If merchandise worth...
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