In this, a is the percentage discount offered if the payment is made within ‘b’ days, and if the payment is not made in ‘b’ days, then the remaining amount is due in ‘c’ days. Purchase discounts are mainly explained using terminology a/b net c. It is mainly maintained by a company that uses a periodic inventory system. Purchase discounts are mainly treated as a general ledger account.
This helps to lower their purchase cost, and therefore, this can impact their profitability. On the other hand, as far as the buyer is concerned, it can be seen that they can avail of a certain discount on their purchase and the trade discount. This helps keep their cash conversion cycle in check, and therefore, this is greatly helpful, essentially because it keeps their liquidity under check. Is able to recover the amount in a quicker time frame. This has advantages for both the seller, as well as the buyer.įrom the sellers’ perspective, it can be seen that he This is mainly an incentive to the purchasing party to settle the bill earlier than the prescribed date. The purchase discount is also referred to as cash discounts.
A purchase discount reduces the purchase price of certain inventories, fixed assets supplies, or any goods or products if the buying party can settle the amount in a given time period.
