Two Types of Discounts
1. Trade Discounts - reduction from the price lists; negotiated discounts that are deducted from listed prices.
2. Cash Discounts - are the amounts deducted from A/R and sales to encourage customers to pay their suppliers withing the discount period.
ACCOUNTING FOR PURCHASES AND ACCOUNTS PAYABLE
Purchase - means buy or acquire
*Purchases as an account title, means goods bought for the purpose of resale without any change in the physical form.
*Sales Return - involves the physical return of the products
*Sales Allowance - does not
Purchase Account - is a cost account; almost like an expense account.
Cost of Goods Sold - deduction from sales to arrive at gross profit
Merchandise Inventory - purchases that is not yet sold
Periodic Inventory System/Perpetual Inventory System - is the process
TERMS OF PURCHASE
1. 30 Days - the amount of the invoice is payable after 30 days. No cash discount is given by the seller.
2. 2/10, n/30 - a discount of 2% is deducted from the invoice price it paid within 10 days from purchase; account should be paid in 30 days.
3. Cash on Deliver (COD) - the invoice price is to be paid upon delivery of the product.
4. Free on Board (FOB) Shipping Point - the buyer pays for the freight or transportation.
5. FOB Destination - the seller pays for the freight.
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Continuation on the next chapter!!
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Accounting
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