Net purchases

Net purchases
See also


Net purchases can be defined simply as the gross purchases of goods in order to be resold, and from the amount purchase returns, discounts and allowances have to be subtracted [1]. These are goods purchased minus purchase returns, allowances, and discounts. The purchase returns happen in a case when people who purchase something, id est the buyers return goods which had been bought from the suppliers [2] acquisition by the payment of money or its equivalent.

\( \text {Net Purchases}= \text {Purchases} - \text {Purchases Returns and Allowances} - \text {Purchases Discounts} \)


In general, a purchase has several definitions, such as something which is bought or purchased, the acquisition by means of labour, effort, etc., the acquisition of any property, such as a land by means which are other than inheritance, all the means of increasing or applying influence, power, etc., as well as a strong and certain footing or grip on something. Also, it is cost of resale to end customer but it does not include insurance costs, storage costs, interests and other[3][4]. a

Account purchases

Due to the fact that return of purchased goods is not only money, but also time consuming, account purchases returns will be created. Because of that, the management of a company is able to notice the size of the returns which have already happened.

  • The purchase allowances can be described as reductions in costs of goods that the buyer had purchased.
  • The allowances are granted by the suppliers due to the fact that there are some problems that may appear during purchasing and after it, such as shipping the goods which are incorrect, the improper number of items, the failures of the goods, etc. When the purchase allowances occur, the purchasers do not return the goods to the suppliers.
  • The purchase discounts are defined as offers aimed at reducing the price of items which is conducted by the suppliers and granted to the buyers as some kind of encouragement to pay in a specific time.

In other words, net purchases are the gross amount of acquisitions and purchases which are made, minus deductions for returns, allowances and discounts of the purchase.[5] The sum of net purchases can be lower in comparison to the quota of gross purchases. The differentiation may be used in order to count and estimate the operating of the purchasing department as well as its effectiveness in achieving the reduction of prices of the goods.

Contra purchase accounts

There are two contra purchase accounts existing in the balance sheet and they are necessary to calculate net purchases[6]:

  1. Purchase discounts - discounts that company receives as invoices were paid early, flip side of that account is sales discount,
  2. Purchase returns and allowances - value of returned items, for example returned to supplier because of late delivery or damaged delivery so products did not meet requested conditions that were supposed to be, flip side of that account is sales returns and allowances.

Below table shows that cost of purchases equals 135 500 and it is start point for calculations. It needs to be decreased by 5 000 because it is the value of dicounts, it gives 130 500. Then, cost of purchases needs to be decreased by cost of returns and allowances - that equals exactly 123 500 and it net purchases value:

Cost of purchases Discounts Returns and allowances Net purchases
135 500 5 000 7 000 123 500

Besides above contra purchase expenses, to calculate net purchases, another account is used as step before to calculate cost of purchases. This is freight in. Purchase value should be decreased by freigh in value[7].

Net purchases together with beginning of inventory value gives value of goods available for sale. Then, after some time at the end of period, goods available for sale might be divided into ending inventory value and cost of goods sold[8].

Debit and credit view

Purchases and expenses are included in debit balance, therefore contra purchase expenses are included in credit side[9]:

Debit Debit Credit Credit
(Sales discount) Discounts 5 000
(Sales returns and allowances) Returns and allowances 7 000
Cost of purchases 135 500
Net purchases 123 500

Author: Ewelina Gał, Jakub Chmiel

Footnotes

  1. Kieso D., Warfield T., Young N., Wiecek I., McConomy B., (2016),
  2. Kieso D., Warfield T., Young N., Wiecek I., McConomy B., (2016),
  3. Walther M. L., Skousen C. J. (2010), p. 24
  4. Loughran M., (2011)
  5. Kieso D., Warfield T., Young N., Wiecek I., McConomy B., (2016),
  6. Loughran M., (2011)
  7. Walther M. L., Skousen C. J. (2010), p. 24
  8. Walther M. L., Skousen C. J. (2010), p. 25
  9. Loughran M., (2011)

References