Definition: The net method is a way to record purchases of inventory with a cash discount. The net method assumes the retailer always takes advantage of the discounted cash price and records the purchased inventory at the discounted price. If the retailer isn’t able to take advantage of the discounted price, the discount is lost and an entry is made to reverse the discounted take in the original purchase entry.
What Does Net Method Mean?
Most retailers buy inventory on account or on credit. These retailers can usually receive a discount for paying in cash since the manufacturers and wholesalers don’t want to have outstanding accounts receivable. An additional discount of 2 percent is a standard cash discount price.
Usually retailers must pay for the inventory in cash within the first 10 days after purchase to receive the discount. Otherwise the full-undiscounted purchase price is due in 30 days. This invoice agreement is usually written like 2/10, n/30 or 2/10, net/30. There are two ways to account for a cash discount: the gross method and the net method.
Example
Let’s look at an example. Assume Big Guitar, LLC buys $2,000 of inventory on January 1st with terms 2/10, n/30. The net method would record the inventory purchase like this:
Download this accounting example in excel.
If the invoice is paid within the first ten days, Big Guitar, LLC would be able to record the payoff at the discounted price.
Download this accounting example in excel.
If Big Guitar, LLC was unable to pay the invoice by January 11, it would have to reverse the discount taken and record the actual payment.
Download this accounting example in excel.
