Definition
Net purchases refer to total purchase after deducting discount obtained from supplier, goods returned to the supplier, and allowances made on the purchase. This figure is used in the calculation for the cost of goods sold. Hence, reflected in the financial statement.
Detailed explanation
The business has to perform various transactions throughout the accounting period. These transactions include making a purchase from suppliers. However, sometimes the business has to return goods to the supplier. For instance, these goods can be faulty or not up to agreed quality. Hence, the business has to return goods to the supplier and adjust the return in the gross purchases. It’s important to note that if purchase return is not adjusted, it might lead to errors in the accounting profit.
Similarly, a business can negotiate some discount with the suppliers. The discount may be obtained by paying cash before the deadline. Hence, it needs to be adjusted in the gross purchases.
Likewise, sometimes the supplier might agree to reduce the price because of some fault in the goods/supplies. This type of discount due to compromise on the quality of a supplies is called allowance on purchases.
Net purchase formula
Following is the formula for calculating net purchase.
Net purchase = Gross purchase –purchases -discount obtained – allowances made
Net purchases example
Following is an example of calculating the net purchase.
Suppose gross purchase made by business during 20XX amounts to $50,000, purchase return amounts to $2,000, cash discounts amount to $1,000, and total allowance on purchase amounts to $500. Net purchases can be calculated with the formula as follows
Net purchase = Gross purchase –purchases -discount obtained – allowances made
| Particulars | Amount |
| Gross profit | 50,000 |
| Purchase return | (2,000) |
| Cash discount | (1,000) |
| Allowance | (500) |
| Net purchases | 46,500 |
$46,500 should be reported as net purchases in the cost of goods/income statement calculation.
Net purchases cost
Net purchase cost is the total cost incurred on purchases. It includes the cost mentioned in the invoice and additional fees/charges collected by the supplier of the goods. Additional charges may be collected on delivery, holding, or any other reason.
Conclusion on net purchases
Net purchase means total purchases made by businesses during the accounting period. This amount is used in the financial statement via income statement and cost of goods sold.
Net purchases are calculated by deducting purchase returns, allowance made on purchase, and discounts received from suppliers.
Frequently asked questions
What is gross purchases?
Gross purchase refers to total purchases made by businesses during accounting periods. It does not consider purchase returns, discounts, and allowances.
Why is accuracy important in calculating net purchase?
Net purchase impacts on the income statement. If forms part of the cost of goods sold as follows.
Cost of goods sold = opening stock + net purchase – closing stock
So, net purchase impact the accounting profit/loss. Hence, it’s mandatory to ensure accuracy for net purchase.
