Question

When do you recognize a purchase discount?

If i am calculating cost of inventory using the weighted avg method (perpetual) and:

I purchase invenotry on July 1st.

On july 8th i pay the accounts payable and receive a 2% discount.

Do i recognize this 2% in my cost of inventory on July 1st or July 8th.

The date i pick will affect my ending inventory and im not sure which one to use.

Answer 1

There are two methods for recognizing the purchase discount, gross method and net method.

Under the perpetual inventory gross method, the inventory is debited for the full invoice amount and accounts payable is credited. If the payment is made within the discount period, accounts payable is debited with full amount, inventory is credited with the amount of cash discount and cash is credited with the net amount paid that is the full invoice amount less the cash discount availed. If the payment is made after the discount period, accounts payable is debited with full amount and cash is credited for the same.

In the given scenario, if the gross method is followed, the 2% discount will be recognized on July 8^th when the payment is made and cash discount is availed.

Under the perpetual inventory net method, the inventory is debited and accounts payable is credited with the amount net of cash discount. If the payment is made within the discount period, accounts payable is debited and cash is credited with the net amount. If however, the payment is made after the discount period, accounts payable is debited with net amount, purchase discount lost is debited with the amount of discount that was not availed and cash is credited with the gross or full invoice amount.

In the given scenario, if the net method is followed, the 2% discount will be recognized at the time of purchase itself on July 1st.