Question

PURCHASE DISCOUNTS INVENTORY NET METHOD

Please explain the following transactions for periodic and perpetcual Discounts using the Net Method.

Receipt of Invoice Periodic Dr. Purchases 980 Cr. Accounts Payable 980 Perpetual Dr. Inventory 980 Cr. Accounts Payable 980 Payment within discount period Periodic Dr. Accounts Payable 980 Cr. Cash 980 Perpetual Dr. Inventory 980 Cr. Cash 980 Payment after discount period Periodic Dr. Accounts Payable 980 Dr. Interest Expense 20 Cr. Cash 1000 Perpetual Dr. Accounts Payable 980 Cr. Interest Expense 20 Cr. Cash 1000

Answer 1

The periodic system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS).The inventory account and the cost of goods sold account are updated at the end of a set period—this could be once a month, once a quarter, or once a year.

The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold. Purchases and returns are immediately recorded in the inventory account.

Within discount period, a discount of 20 is adjusted and final amount of 980 is shown in the entries.

After the discount period, that discount is "foregone", so it is treated as an expense or loss. Therefore, full amount of 1000 is debited.