PARRISH Pg. 173  PURCHASE DISCOUNTS INVENTORY NET METHODPlease explain the following transactions for periodic and perpetcual Discounts using the Net Method. Receipt of InvoicePeriodicDr.     Purchases                  980Cr.                Accounts Payable 980PerpetualDr.      Inventory  980Cr.              Accounts Payable  980Payment within discount periodPeriodicDr.        Accounts Payable      980Cr.                            Cash              980PerpetualDr.   Inventory          980Cr.                 Cash          980Payment after discount periodPeriodicDr.      Accounts Payable 980Dr.      Interest Expense  20Cr.                  Cash                1000PerpetualDr. Accounts Payable       980Cr.           Interest Expense           20Cr.           Cash                                                                                                                                                    1000

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Asked Feb 13, 2020
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PARRISH Pg. 173  PURCHASE DISCOUNTS INVENTORY NET METHOD

Please explain the following transactions for periodic and perpetcual Discounts using the Net Method.

 

Receipt of Invoice

Periodic

Dr.     Purchases                  980

Cr.                Accounts Payable 980

Perpetual

Dr.      Inventory  980

Cr.              Accounts Payable  980

Payment within discount period

Periodic

Dr.        Accounts Payable      980

Cr.                            Cash              980

Perpetual

Dr.   Inventory          980

Cr.                 Cash          980

Payment after discount period

Periodic

Dr.      Accounts Payable 980

Dr.      Interest Expense  20

Cr.                  Cash                1000

Perpetual

Dr. Accounts Payable       980

Cr.           Interest Expense           20

Cr.           Cash                                                                                                                                                    1000

 

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Expert Answer

Step 1

Journal entries is recording the of the transaction in the accounting journal in a chronological order. The entries are recorded as the Debit balances and Credit balances.

The golden rules of accounting that are needed to be kept in mind for journalizing:

  1. Personal account: The receiver needs to be debit; the giver needs to be credit.
  2. Real account: What comes in needs to be debit; what goes out needs to be credit”
  3. Nominal account: All expenses and losses need to be debit; all incomes and gains needs to be credit.”
Step 2

As per the net method, the company records the amount of purchase by deducting any early discount from the invoice amount i.e. net amount is recorded after potential discount have been deducted from the gross price.

Receipt of invoice:

As per the question, the goods are purchased at a gross price of $1,000 and there is a potential discount of $20. The journal entry that is passed as per periodic method is purchases are debited and as per the perpetual method inventory is debited and accounts payables are credited. The amount recorded is $980, which is the net amount.

Calculation of net amount:

Net amount= Gross amount – potential discount

                   = $1,000 - $20 = $980

Step 3

Payment within the discount period:

The potential discount means it is the discount that the buyer will get, if he will make the payment within the discount period. If the payment is not made in the discount period, the buyer will not be able to avail the discount.

The accounts payable is debited as per periodic system to close the accounts and cash is credited as there is an outflow of cash. The payment is made within...

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