Definition of Purchase Discount
A purchase discount is a deduction that a company may receive if the supplier offers it and the company pays the supplier’s invoice within a specified period of time. The purchase discount is also known as a cash discount or early-payment discount. (A supplier offering the discount will record the discounts taken by its customers in the account Sales Discounts.)
Purchase Discounts is also a general ledger account used by a company purchasing inventory goods and accounting for them under the periodic inventory system.
Example of Purchase Discount
Assume that a company receives a supplier’s invoice of $5,000 with the credit terms 2/10 net 30. The company will be allowed to subtract a purchase discount of $100 (2% of $5,000) and remit $4,900 if the invoice is paid in 10 days. Otherwise, the company must pay the full $5,000 within 30 days.
If a company purchases office equipment for $20,000 and the invoice has credit terms of 1/10, net 30, the company can deduct $200 (1% of $20,000) and remit $19,800 if the invoice is paid within 10 days. If that occurs, the company will record the equipment at its cost of $19,800.
