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Gross Price vs. Net Price

Instructor: Sanghamitra Das

Sanghamitra has a master's in Finance and has a professional working and teaching experience of over a decade.

Gross Price and Net Price are two methods of recording cash discounts related to purchases. Read on to know more on the difference between the two methods.

The Difference Between Net Price and Gross Price Methods of Recording.

Suppliers and buyers have a unique relationship based on trust. This helps a supplier sell a portion of his quarterly or annual sales in credit. Usually, a buyer expects a convenient credit term with some discount. A credit term is a condition for payment expressed by the seller and agreed to by the buyer. To understand this better, here is a sample credit term : '2/10, n/30'. This credit term has two parts, which we will explain through two cases below.

Case 1: The first part of the credit term is 2/10, wherein the number 2 denotes the discount percentage offered by the seller. The 10 denotes the number of days from the invoice date within which the buyer should make the payment to avail (or take advantage of) the mentioned discount. Let's assume the invoice value to be $1,000 and the buyer makes his payment any day within ten days from the invoice date. Thus, he pays $20 less and continues with the business relationship happily. The effect of this transaction in the books of accounts will be as follows:

Accounts Payable Dr. $1,000

To Purchase Account Cr. $20

To Cash Cr. $980

Case 2: The second part of the credit term is n/30. Let's continue with the assumption of an invoice of $1,000 and this time the buyer is unable to make the payment within the ten days. Thus he is no longer eligible for any discount. He is now required to pay the full invoice, which is the net amount of $1,000. The 'n' in the credit term denotes net amount which becomes due, 30 days from the invoice date. In some cases it could be n/45, which would then mean that the net amount becomes due 45 days from the invoice date. The effect of the assumed transaction on the books of accounts will be as follows:

Accounts Payable Dr. $1,000

To Cash Cr. $1,000

Recording a purchase discount may have a significant impact on the cost of inventory, and it can be done using either the Net Price Method or the Gross Price Method.

Net Price Method and Gross Price Method

The Net Price Method records the purchase initially in its net price. The discount amount is recorded only if it is not availed. The objective of such a payment system under the Net Price Method is to note the loss of discount as an expense later. In the Gross Price Method the purchase amount is recorded at its gross value. The discount amount is recorded only if it is availed. The objective of such an entry in the accounting system is to reduce the discount value from the purchase price of the inventory.

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