Question

What does a company record when it purchases inventory under the net method, and it does not take the cash discount granted by the seller?

Where is it on the multiple step income statement?

Answer 1

when inventory is purchased from the seller cash discount will be there for early payment. the buyer will have opportunity to make a payment with the specified time period known as discount period. if buyer does so seller gives a specified percentage of discount. sunch inventory on which cash discount is given can be recorded in two methods by the buyer in the books.

1) gross method

2) net method

1) gross method:- gross method initially record the purchase at gross price. after that , it depends on whether the payment is made within the discount period or not. if it is paid within the discount period the buyer will get cash discount other wise not. if the payment is paid after the discount period the seller will not give any discount to the buyer.

journal entires:-

a) when inventory purchased

inventory a/c    dr

   To accounts payable a/c

b) for payment within discount period.

accounts payable a/c dr

To cash a/c

   To purchase discount a/c

c) for payment after discount period

accounts payable a/c dr

   To cash a/c

2) NET METHOD:- in net method, buyer record the purchase inventory at net price that is gross price less potential discount. if discount is availed. if the buyer makes the payment within discount period there will be no extra entry only cash payment will be made. if buyer makes payment after discount period. they make an entry as purchase discount lost.

journal entries:-

a) for purchase inventory:-

inventory a/c    dr

   To accounts payable a/c

b) for making payment within discount period

accounts payable a/c    dr

   To cash a/c

c) for making payment afer discount period

   accounts payable a/c    dr

purchase discount lost    dr

   To cash a/c

MULTIPLE STEP INCOME STATEMENT:-

MULTIPLE STEP INCOME STATEMENT IS THE INCOME STATEMENT OF THE COMPANY WHICH TOTALS OPERATING REVENUE FROM NON OPERATING REVENUES AND TOTAL OPERATING EXPENSES FROM NON OPERATING EXPENSES. IT MEANS SEPERATING TOTAL REVENUES FROM TOTAL EXPENSES OF A PARTICULAR PERIOD INTO TWO DIFFERENT CATEGORIES THAT IS OPERATING AND NON OPERATING.

FORMAT OF MULTIPLE STEP INCOME STATEMENT

SALES :-    XXX

COST OF GOODS SOLD :-    ( XXX)

OPERATING EXPENSES:-   

SELLING EXPENSES

   ADVERTISEMENT EXPENSES XXX

COMMISSION EXPENSE    XXX

ADMINISTRATIVE EXPENSES

STAFF EXPENSE    XXX

   OFFICE EQUIPMENT EXPENSE    XXX

TOTAL OPERATING EXPENSE ( XXX)

OPERATING INCOME :- XXX

NON OPERATING/ OTHERS

INTEREST INCOME XXX

INTEREST EXPENSE    ( XXX)

LOSS ON SALE OF PROPERTY (XXX)

TOTAL NON OPERATING XXX

NET INCOME XXX

  

   HOW PURCHASE INVENTORY WILL BE THERE IN MULTIPLE STEP INCOME STATEMENT

inventory is an assets it will be recorded in the current assets account. but it effects the income statement. when you purchase a inventory the transaction will effect balance sheet. the offsetting entry will be cash or accounts payable depending on the method used to purchase a inventory. in the net method, the inventory will be written in net price value. there will be discount which is already taken into account. after making the payment it will be deducted as they do not take discount granted by the seller.