Net price method definition
/What is the Net Price Method?
The net price method is the recordation of supplier invoices after the amount of any related discounts have been deducted. The entry is to debit the relevant asset account or expense account for the net price and credit accounts payable for the net price. If the entity does not then take advantage of the related discount, a separate entry is needed to add the discount back to the accounting records; in this case, the entry is a debit to the discounts lost account (an expense account) and a credit to the accounts payable account.
Disadvantages of the Net Price Method
There are several disadvantages to the net price method that limit its practical application. They are as follows:
Complexity. A journal entry is required to record discounts not taken, if the accounting staff forgets to do so.
Up-front calculations. It requires the accounting staff to calculate the amount of the discount to be taken at the time when an invoice is initially recorded. This can slow down the invoice data entry process for the payables staff.
The Gross Price Method
An alternative to the net price method is the gross price method, where the pre-deduction amount is recorded in the accounts payable account, with any related discounts being recorded separately. Two advantages of the gross price method are:
It is less complex for the payables staff to record the full amount of each invoice as it is received
It is easier to determine the total amount of discounts taken
The net price method is the most theoretically correct way to record supplier invoices, since the effects of discounts are taken into account at once, rather than in a later accounting period when the discounts are actually taken. However, given the issues noted here, the gross price method is used much more frequently than the net price method.