Q. What is Purchase Discounts account?
The buyer records the purchase discount merely when the invoice is paid within the discount period and the discount is taken. The Purchase Discounts account is the contra account to Purchases that decrease the recorded invoice price of the goods purchased to the price actually paid. Hanlon files purchase discounts in the income statement as a deduction from purchases.
Companies found purchase discounts on the invoice price of goods. If an invoice demonstrates purchase returns or allowances they should be deducted from the invoice price before calculating purchase discounts. For instance in the previous transaction the invoice price of goods purchased was USD 30000. If Hanlon returned USD 2000 of the goods the seller compute the 2 percent purchase discount on USD 28000.