Accounting for Net Purchase
Net Purchase is the total amount of purchase exclude purchase return, discount, and allowance made. Net purchase is literately less than the gross purchase.
Purchase is the amount company spends on suppliers in order to obtain the goods during the year. It includes both cash and credit purchase. Cash purchase is the business transaction that is paid when goods arrived. Credit purchase is the purchase in which cash is paid within a period of time.
Net Purchase Formula
Net Purchase = Gross Purchase – Purchase return – Discounts – Allowance
- Purchase/Gross Purchase: is the amount that supplier bill to the company for the goods purchase during the accounting period.
- Purchase Return: is the goods that are return back to the supplier due to various reasons such as damage, wrong specification, and so on.
- Purchase Discounts: is the amount of discount which the company receive from supplier due to early payment. The other types of discounts are not included as they are already reflected with the purchase amount on invoices.
- Purchase Allowance: is the deduction of purchase by suppliers due to various reasons such as defective goods, incorrect quantity, and imperfect goods. The buyer does not return the goods, they decide to keep the goods and ask for price deduction in the future purchase.
Net Purchase Example
Company ABC place the order of 10,000 units of goods at $20 per unit from the supplier, XYZ. Due to bulk purchase, XYZ gives 5% discount on the total purchase and issues an invoice amount $190,000 with term 2/10 net 30.
One week later, goods arrive and after inspection, ABC decides to return 1,000 units due to quality issues. Moreover, ABC has make payment within 30 days to take advantage of early payment discount.
Please calculate net purchase.
Purchas/Gross Purchase = (10,000 units x $20/unit) * 95% = $ 190,000
Purchase Return= (1,000 x 20) x 95% = $ 19,000
Purchase Discount = (190,000-19,000)*2% = $ 3,420
Net Purchase = 190,000 – 19,000 – 3,420 = $ 167,580
Net Purchase Vs Cost of Goods Purchase
Cost of goods purchase is the total amount that company spend to acquire goods within an accounting period. It must include all costs that needs to bring the goods to the warehouse and ready to use. It is the total of net purchase and freight-in.
Cost of Goods Purchase = Net Purchase + Freight-In