What Are Net Purchases In Accounting?
Net purchases represent the amount of purchases made after taking into account discounts, returns, and allowances. These deductions can be made for a variety of reasons, such as when goods are returned or for promotional discounts.
Tracking net purchases is important for assessing the efficiency of the purchasing department in obtaining price reductions. This is done by subtracting purchase discounts, returns, and allowances from gross purchases to determine the amount of net purchases.
By doing so, it can be determined if the purchasing department is efficiently obtaining price reductions, enabling the organization to maximize its profits.
Thus, net purchases are an important element of accounting that should be tracked and monitored.
Gross Purchase
Gross purchase is the total amount of purchase made by a company before deductions for returns, allowances, and discounts are taken into account. The cash purchases require immediate payment, while credit purchases allow for payment at a later date. The purchase account is debited when purchases are made against cash or trade payables. A periodic inventory system is used to track the purchase account, not a perpetual inventory system.
| Type of Purchase | Payment | Accounting Impact |
|---|---|---|
| Cash Purchase | Immediate | Debit Purchase |
| Credit Purchase | Later | Debit Purchase |
The purchase account is used to record the total amount of purchases made by the company. This figure includes the cost of any purchase returns, allowances, and discounts that are applied. The total figure is then compared to the total amount of sales to determine the net profit or loss on the sales. Additionally, this comparison is used to assess the inventory levels of the company.
Gross purchase is an important accounting concept that provides an overview of the company’s purchasing activity, and helps to identify any discrepancies in the financial reporting. It is imperative that a company accurately tracks its gross purchases in order to correctly report its financial position and performance.
Calculate Net Purchase
Calculating the difference between gross purchases and returns, discounts, and allowances provides a useful indication of the company’s buying activity.
Generally, net purchases are calculated as follows:
- Gross Purchases minus Purchase Returns
- Gross Purchases minus Purchase Discounts
- Gross Purchases minus Purchase Allowances
- Gross Purchases minus Purchase Returns, Discounts, and Allowances
Net purchases amount is then included in the income statement and reported in the notes to the financial statements.
Companies use this information to better understand their purchasing activity and financial position, which enables them to make more informed decisions in the future.
This information can also be used to compare the company’s current position to that of its peers.
By understanding net purchases, companies can better monitor their buying activity and make more informed decisions about their future purchases.
COMPONENTS OF NET PURCHASES?
Net purchases are calculated by subtracting certain components from gross purchases. These components include purchase returns, purchase discounts, and purchase allowances.
Purchase returns refer to the value of goods returned to the supplier, while purchase discounts are deductions taken from the invoice amount. Purchase allowances refer to the amount of money paid to the customer for any defective items.
All three components are important for accurately calculating net purchases.
PURCHASE RETURNS
The process of purchase returns involves returning goods to suppliers for a variety of reasons, such as receiving damaged items, to offset purchase expense that cannot be reversed.
Companies must record the purchase returns in a separate account in the general ledger of the company to account for the return. This account is a contra account to the purchase account, which decreases the total amount of purchases for the period.
The purchase returns account can be used to record both returns of goods and allowances given to customers from the supplier for any goods that may have been damaged or defective. The amount recorded in the purchase returns account offsets the total purchase expense, resulting in the calculation of net purchases for the period.
It is important to note that the purchase returns account is a necessary component of accurately calculating and recording net purchases.
PURCHASE DISCOUNTS
Cash discounts represent a reduction in the cost of goods purchased on credit, creating an opportunity for companies to save money.
Cash discounts are offered by suppliers when a company pays for the goods within a specific time period. In order to take advantage of the discount, companies must pay within the time frame specified by the supplier, usually within 15 days.
The discount is deducted from the gross purchases, resulting in a lower amount of money paid for the goods.
The types of cash discounts vary, but are usually either a percentage of the total cost or a fixed amount. For example, a supplier may offer a 10% discount if payment is received within 15 days of the invoice date, with a credit term of 30 days.
Companies can use cash discounts to reduce their overall cost of goods purchased and save money.
PURCHASE ALLOWANCES
The previous subtopic discussed purchase discounts, which require prompt payment in order to reduce the price of goods. Purchase allowances, on the other hand, have similar effects, but do not require prompt payment. This form of reducing the price of goods is often used to avoid purchase returns and is beneficial for both the seller and the buyer.
Table 1 below provides an overview of the differences between purchase discounts and purchase allowances. As shown, purchase allowances provide a more flexible payment option, as the buyer does not have to pay immediately in order to receive a price reduction.
| Feature | Purchase Discounts | Purchase Allowances |
|---|---|---|
| Payment | Prompt Payment Required | No Prompt Payment Required |
| Price Reduction | Yes | Yes |
| Effect on Purchase Returns | Minimized | Minimized |
Conclusion
The concept of net purchases is an important part of accounting.
It is the result of subtracting returns, discounts, and allowances from the total cost of goods purchased.
It is essential for businesses to understand the components of net purchases in order to accurately determine their profits.
Through careful analysis of the purchase process, businesses can ensure that they are accurately accounting for their costs and earnings.
By having a clear understanding of the components of net purchases, businesses can make sure they are accurately reflecting their true financial picture.