We all love discounts, but why would a company offer sell a discount on their products? Typically, a company might offer a discount to increase sales, make an unhappy customer happy or incentivize a customer to salary quickly.

You are watching: When using a perpetual inventory system, why are discounts credited to inventory?

Understanding Payment Terms

Typically when customers purchase inventory, they space not intended to pay cash. The seller extends credit to the buyer, yet extending credit comes at a expense for the seller. The seller walk not have actually the cash and therefore must pay its receipt from other sources, one of two people cash to make reservation or borrowing. The seller may lose out on attention earned on cash make reservation or possibly even pay attention on loan or present of credit. In order to decrease the moment a receivable is outstanding, a firm may market a discount for quick payment. As soon as a firm offers this type of discount, the is provided in the payment terms on the bill:

Payment terms: 2/10, n/30

What walk this mean? Well, very first notice the comma. That method there are two parts to the payment terms. So let’s look at every part, starting with 2/10. This walk not typical that the bill is early on February 10. It means “2% discount if paid in 10 days”. Therefore, if the date of the invoice is February 15 and also you pay the invoice on or before February 25, you get a 2% discount off the balance due. What happens if you don’t pay in the first 10 days? because that that, we have to look in ~ the statement after the comma: n/30. The “n” in the statement represents net. So the explain tells us that the net, or entire, amount is early in 30 days. Taking it every together, the declare is as follows:

Payment terms: If paid within 10 days, us will provide you a 2% discount, or you can pay the complete balance within 30 days.

Can you check out why businesses favor 2/10, n/30? Takes up a many less space on a bill. What happens if you don’t pay with bill within 30 days? ~ 30 days, her payment is now late and also the seller can include on so late charges or interest, relying on state law.

Let’s look at some examples using payment discounts.

Example #1:

Medici Music purchased instruments to offer in its shop from Whistling Flutes, gmbh on respectable 13. The total purchase was $5,000 with terms 3/10, n/30. Medici paid for the acquisition on august 20. Document the important journal entries for Medici Music.

The very first step is to malfunction the information. Medici purchased inventory for $5,000 on august 13 and paid the invoice on respectable 20. Looks like we have two transactions. Wait! us are managing inventory. Have actually you realized us are lacking something? If not, take it a 2nd to view if friend can number it out. Is Medici using regular or perpetual inventory? Remember, we are around to record an entry handling the motion or readjust in value of inventory! I recognize we are talking around payments here however we space still talking around inventory. The trumps the payment discussion!

We will certainly look at this transaction under both approaches so you have the right to see the difference. Before we start looking at every method, let’s begin by discussing what is the exact same under each of the methods. We have actually two transactions. The first transaction encounters the purchase of the inventory. The 2nd transaction faces the payment for the instruments already received.

When working through discounts, we generally calculate the discount and also record that at the time of payment. Part textbooks may present you two various methods for recording the discount, one in i m sorry the discount is taped at the time of the purchase and one where the discount is tape-recorded at the moment of the payment. I prefer the second method. Once you record the discount at the time of the purchase and the discount is no taken because the buyer does not pay within the discount window, us must change the payment entry come undo the discount bring away in the very first entry. By record the discount at the moment of the payment, we are only recording a discount that has actually actually to be taken and we never have to undo something native the very first entry.

Perpetual Inventory

First, we have to record the entry to display the purchase of the inventory.

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Read Transactions Slowly!

The biggest difficulty students have with this object is confusing purchase and sale transactions. Ns have had students carry out the problem perfectly, other than they provide me the newspaper entries for the purchase when I ask because that the sale or evil versa. Invest extra time if needed to make certain that you know what the transaction in reality means. Carry out not run right into the entries until you understand what is keep going in the transaction. Typically, a problem will state which company you must do the entries for. Go ago through the transactions to view if the firm is the buyer or seller. Sometimes, ns will even note that when I am analysis the problem. Review the transactions closely or you may shed a the majority of points top top a problem you know exactly how to do.