Purchase discounts

Definition

Purchase discounts are reductions in the price of goods offered by suppliers to buyers as an incentive for early payment. These discounts are typically expressed as a percentage and have specific terms such as 2/10, n/30.

5 Must Know Facts For Your Next Test

1. Purchase discounts reduce the cost of inventory purchased.
2. The term '2/10, n/30' means a 2% discount is available if payment is made within 10 days; otherwise, the net amount is due in 30 days.
3. Purchase discounts are recorded in the accounting records as a reduction in the purchase cost.
4. These discounts can significantly improve cash flow management for businesses.
5. Failure to take advantage of purchase discounts can result in higher costs and lost savings.

Review Questions

Related terms

Trade Credit: The credit extended by suppliers allowing buyers to pay later for goods received today.

Accounts Payable:

Money owed by a company to its creditors for items or services bought on credit.

Cash Discount: A reduction in price offered by a seller to encourage early payment from a buyer.