Purchase discounts lost definition
/What is Purchase Discounts Lost?
Purchase discounts lost is a general ledger account that contains the amounts a business did not save through its failure to take early payment discounts offered by suppliers. This information is aggregated for reporting to management, and is also used for subsequent analysis to improve the payment processing procedure. This account usually contains too small an amount to report it separately in the financial statements, so it is instead aggregated into another line item for reporting purposes.
The purchase discounts lost account is only used when a business records its accounts payable using the net method. Under the net method, supplier invoices are recorded at the amount that will be paid after any early payment discounts have been applied. This differs from the standard approach, under which the full amount of each supplier invoice is initially recorded, with any early payment discounts recorded only when payment is eventually made. If the recording entity does not pay for the invoice by the date needed to allow for a discount, then the amount of the discount must be added back to the supplier invoice amount, which requires an additional journal entry.
Example of Purchase Discounts Lost
A company receives a $1,000 supplier invoice that offers it a $20 discount if it pays within 10 days; otherwise, it must pay the full amount in 30 days. Through an oversight, the early payment does not occur, so it is instead processed in 30 days. The associated journal entry is a debit to accounts payable for $980, a debit to purchase discounts lost for $20, and a credit to cash for $1,000. If the firm had instead paid by the early payment date, then the entry would have been a debit of $980 to accounts payable and a credit of $980 to cash.