Calculate Net Purchase with Formula
Net Purchase is the amount of purchase that company made excluding discounted receive, allowance made, and goods returned. It is the amount that the company has calculated during a certain period of time.
Purchase is the amount that a company spends to acquire the goods or services. They acquire goods and make payments to suppliers in exchange. Sometimes, there are other components that incur during the purchase such as discounts, purchase returns, purchase allowance, and so on.
Net Purchase Formula
The net purchase is equal to gross purchase less goods return, discount, and allowance:
|Net Purchase = Gross Purchase – Discount Received – Allowance
Purchase is the process that company acquires goods, services, fixed assets, and other materials. It is the process that company acquires such an item by an exchange of money or other assets. Companies purchases these items for the purpose of reselling or supporting their own operation.
The manufacturer purchase raw material to support its operation and produce the finished goods. They also purchase the machinery to run the operation. The trading company purchases inventory to resell for a profit.
It includes both cash and credit purchase. The cash purchase refers to the purchase that company has to pay the supplier immediately after receiving goods. Credit Purchase refers to the purchase the supplier allows the buyer to have the goods for a certain time before making payment.
The purchase will impact many different accounts depending on the nature of the purchase. The purchase of raw materials and finished goods will impact the inventory account. The purchase of machinery and equipment will impact the fixed assets account.
Purchase Discount is the amount of discount that suppliers provide to customers when they settle the accounts payable within a specific time period.
The supplier sells the goods on credit to the customers to increase the sale volume and allows customers to collect cash. In order to persuade the buyer to pay early, the supplier provides a discount if they make payment early.
The credit term is the time that supplier allows the buyer to owe the money. However, if the buyer can make payment within a certain period, the supplier will provide a discount. This discount will depend on the supplier’s credit policy.
When the customer makes payments early, they are required to pay less than the accounts payable record.
As the name suggests, purchase return is the goods that supplier has delivered to the buyer but the buyer return back. The purchase return happens when there is a quality issue with the goods. The items are broken during the delivery process. The goods’ specifications are different from the purchase order. There are common reasons that can lead to the purchase return.
The purchase return happens after the company accepts the goods. So customers have to revere the items from the balance sheet and debit the accounts payable.
Purchase allowance is the reduction of purchased goods due to some reasons such as wrong items, incorrect quantity, and damaged goods. The supplier provides a purchase allowance to persuade the customer to accept the goods. They agree to reduce the price of the purchase order.
When the supplier provides a purchase allowance, the customer will decrease the accounts payable and inventory. The seller provides such kind of discount to prevent the customer to return the goods.
Example of Net Purchase
ABC is a retail store that sells a variety of goods to consumers. They purchase finished goods from many suppliers to ensure enough goods for the customers.
During the month, company has purchased the following items:
- Item A 100 units at $5 per unit
- Item B 200 units at $ 2 per unit
- Item C 500 units at $ 3 per unit
In addition, there are several transactions as follows:
- Company receive a 5% discount for the purchase of item A as they make full payment over the purchase
- 50 units of item B are returned due to the quality issue
- The supplier provides purchase allowance $ 0.5 per unit for item C due to slight error in the product specification.
Please calculate the net purchase.
First, we have to calculate the purchase. As there are multiple purchase, we have to include all of them as following:
- Item A = 100 units * $5 = $ 500
- Item B = 200 units * $2 = $ 400
- Item C = 500 units * $ 3 = $ 1,500
The total purchase equal to $ 500 + $ 400 + $ 1,500 = $ 2,400
Next, we have to calculate other components such as:
Purcahse discount = 5% * $ 500 = $ 25
Purchase Return = 50 units * $ 2 = $ 100
Purchase Allowance = 500 units * $ 0.5 = $ 250
Net Purchase = Purchase – Purchase Discount – Purchase return – Purchase Allowance
= $ 2,400 – $ 25 – $ 100 – $ 250 = $ 2,025