Alright, so now let's see what happens when we get a purchase discount, which is a discount for paying quickly to our supplier. You might have seen this already when we talked about sales discounts. If you haven't seen sales discounts yet, I'm sure you will, but you're going to see that it's very similar to this lesson, except now, instead of talking about selling something and offering a discount to our customer, we're the customer getting a discount from our supplier. So let's check it out in this situation. There's a special system used to denote discounts, and let's go through it here. This is how you usually see a discount. You'll see "2/10, net 30". That's how you read that. The "2/10, net 30", the 'n' stands for net, just like you see in the second quote there.

So, let's see what these numbers mean. The numbers are what really matters, and what really matters are those first two numbers. Those are the most important ones. So, the first two there, the "2/10, net 30", the "2", that's the percentage amount of discount that you're going to get. You're going to get a 2% discount if you pay within 10 days. The purchase happened on one day, and now you have the next 10 days to pay and get a 2% discount. The "30" represents the total days you have to pay. So, they told you if you pay within 10 days, you can take a 2% discount, but you have to pay us the full balance by the 30th day. When we solve problems like this, that "30" doesn't really matter, okay? What's really the focus in this class is that percentage discount and whether they qualified for the discount, those first two numbers, the "2" and the number of days that have passed.

Let's check out this example, ABC Company purchased 300 units of Product X for $1800 on January 14, the supplier offered terms of "3/10, net 45". Notice this is different than above; we saw "2/10, net 30", but the principles stay the same. In this case, we're talking about a 3% discount if you pay within 10 days, and then a total of 45 days to pay, but notice that the "45", we're not really going to use it in the problem. So, the supplier offers terms of "3/10, net 45". ABC Company paid the supplier on January 19th. It's really important to think of the dates to see if we qualify for the discount. So, record the purchase and payment in ABC Company's books.

Okay, we're going to have 2 journal entries here, one for the purchase and one for the payment. Obviously, that's what we just said. So let's do the purchase one first. It told us we bought 300 units for $1800 right? The $1800, that's the big number we want, we want dollar values. So, we spent $1800 on inventory, so we're going to debit our inventory for $1800, right? Because that's what we bought, so we're increasing our inventory by $1800, but we haven't paid them yet. We're going to pay them at a future date, right? So, we have an accounts payable, AP for accounts payable of $1800, at some future date, we should have to pay $1800 to them, but what we're going to see is that we get a discount, right? Because in this situation, we purchased it on the 14th and paid on the 19th. That's within our 10-day window, right? On the 15, 16, 17, 18, 19, we paid 5 days later. Cool? So, that's within our 10-day limit to get the discount. So, we're allowed to pay 3% less, right? We get a 3% discount. Let's go ahead and see what that 3% discount is. So, we have $1800 times 3%, $1800 times 0.03 that's $54. $54 is the amount of the discount, so we get to pay that much less instead of paying $1800.

So, let's see how much we do actually pay, $1800 minus the $54 is $1746, okay? So, that is the actual cash that's going to come out of our pocket. We got a discount of $54, but the actual cash is $1746. So, in a perpetual system, we just put all our entries straight up into inventory, okay? So, the first thing we want to do is we want to get rid of the payable, right? It says that we owe $1800 well, we're about to pay that money off, so we're not going to owe the $1800 anymore, we're going to debit accounts payable for $1800 right? We no longer owe that money because we're making the payment. Now how are we paying? We're going to pay with cash and that cash was $1746 like we figured out above, right? So, the last thing is to make this balance, we need that $54 discount. And that discount is just going to go straight to our inventory. We're going to decrease the value of our inventory by the amount of the discount.ởSo, inventory is going to have a credit for $54, alright? And this brings down the value of the inventory to what we actually paid for it, right? We didn't actually pay $1800, we actually paid $1746 and that's what's happening in this question, is bringing down that value to $1746, right? So, in the first entry, our inventory, this one's gonna get a little close here. Our inventory went up by $1800 and our AP went up by $1800. Accounts payable went up by $1800 in the first entry and then what happened in the second entry? Well, our accounts payable went down by $1800. Right? So, that gets rid of that change, and then our cash went down by $1746, and our inventory went down by $54. Okay, so if we were to net this amount of inventory, right it went up by $1800 and then down by $54, that's the $1746 right there, right? So, inventory went up by $1746 and cash went down by $1746, right? So, our assets stayed equal there, our liabilities stay equal and our equation balances, right? So cool, let's go ahead and pause here and then do a practice problem in the next video. You guys can take a stab at this.