How to Define Purchase Discount
Running a successful business means taking advantage of any and all opportunities to save money, no matter how small the savings might be. In accounting, it is important to scrutinize every aspect of accounts payable to make sure you are authorizing advantageous transactions. A purchase discount, which is often given by business suppliers for bulk ordering, is one such method of saving money.
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Instructions
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Know that a purchase discount is a set amount of money that a business saves on a specific order. In some cases, the purchase discount grows as you build a relationship with the supplier, but in others the supplier devises a purchase discount sale that it applies to all accounts.
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Understand that a purchase discount includes a set amount of money that the business saves for paying within a set amount of time. For example, if a business places a $10,000 order with a supplier, the supplier might then offer a 200/10 purchase discount. This means that the business saves $200 on the $10,000 order if it pays within ten days.
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Realize that there is also a payment deadline that must be met. Even if a purchase discount is offered, the supplier might operate on a net 30 or net 60 schedule, which means that payment must be made within 30 or 60 days. After the 10 days, however, the purchase discount doesn't apply.
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Know that suppliers sometimes accept partial payments. For example, in the aforementioned example, the business might be able to pay $5,000 within 10 days, but might have to wait 20 days before remitting the final $5,000. In this case, the purchase discount would be likewise divided in half, and the business would only pay $4,900 for the first payment, then the full $5,000 for the second payment.
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Understand the difference between net and gross when it comes to purchase discounts. With a net discount, the business can apply the savings to the payment at the time it is remitted, but with a gross discount, the savings is applied to future orders.
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Tips & Warnings
The gross method of purchase discounts is becoming more popular than the net method because the former encourages customer loyalty and repeat business.
In most cases, a purchase discount can be negotiated with the supplier. If you feel that you aren't getting a significant deal, consider asking for more attractive terms in exchange for your continued patronage.
A purchase discount can be applied to individual consumers as well as businesses. If you prefer to purchase certain items in bulk directly from suppliers, ask about the discounts they offer to repeat customers.
Learn to recognize the format for purchase discounts: amount of discount/time limit (e.g., 200/10).
Keep careful track of your accounting records if a supplier operates on a gross purchase discount schedule. This way, you'll know that you are receiving the savings on future orders.
