Question

What are the journal entries for both the gross and net method at the time of purchase of $5,000 under the terms 2/10, n/30, the journal entry when $3,000 is paid within the discount period and $2,000 paid after the discount period. (While you do these journal entries mentally note the similarities and the difference between the A/R and the A/P side of the entries.)

                                        Gross Method                                       Net Method

Answer 1

Solution:

Under the gross method, the purchases/sales are recorded at its cost/sales price without decreasing the amount of probable purchase/cash discount. Later on when the company pays within the terms of availing cash discount, the discount is recorded separately in the entry on the date of payment done.

Net Method is a way to record purchase or sales with a cash discount. The net method assumes that customer always takes advantage of the discounted cash price and record the sale or purchase at the discounted price.

Journal Entries under Gross Method

General Journal	Debit	Credit
Merchandise Inventory / Purchases	$5,000
Accounts Payable		$5,000
(To record purchases on account)
Accounts Payable	$3,000
Cash ($3000*98%)		$2,940
Cash Discount on Purchase or Purchase Discount		$60
(To record the payment within discounting period)
Accounts Payable	$2,000
Cash		$2,000
(To record the payment after discounting period)

Journal Entries under Net Method

General Journal	Debit	Credit
Merchandise Inventory / Purchases ($5,000*98%)	$4,900
Accounts Payable		$4,900
(To record purchases on account)
Accounts Payable	$2,940
Cash ($3000*98%)		$2,940
(To record the payment within discounting period)
Accounts Payable (2000*98%)	$1,960
Cash Discount or Purchase Discount (Bal fig)	$40
Cash		$2,000
(To record the payment after discounting period)

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