If you purchase $1000 of goods having a trade discount of 20%, you can debit Purchases (periodic system) or Inventory (perpetual system) for $800 and Accounts Payable for $800. This is consistent with the cost principle which means the cash or cash equivalent amount.

If the invoice allows a 1% discount for paying within 10 days, you can record the 1% discount when you make payment within the allotted time. The entry for paying within 10 days would be: debit Accounts Payable $800, credit Cash for $792, and credit Purchase Discounts $8 (or Inventory $8 if perpetual).

If you are certain to always pay vendor invoices within their discount periods, you could initially record the above invoice at $792 (instead of $800). Debit Purchases or Inventory for $792 and credit Accounts Payable $792. When paying the invoice within the discount period, the entry would be a debit to Accounts Payable for $792 and a credit to Cash for $792. If you fail to pay the invoice within the discount period, the payment will have to be $800 and will be recorded with a debit to Accounts Payable $792, a debit to Purchase Discounts Lost $8, and a credit to Cash for $800. Purchase Discounts Lost is an income statement account.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

Learn more about AccountingCoach Pro