Gross price method definition
/What is the Gross Price Method?
The gross price method involves recording a purchase at its gross price when it is first recorded in an organization's payables system. The assumption behind the use of this method is that the payables staff will not take any early payment discounts. When few suppliers offer these discounts, it is more efficient to use the gross price method, since no further entry is required to document a payable. However, if many suppliers offer discounts and those discounts are taken, it makes more sense to use the net method, where purchases are initially recorded with the related early payment discount.
Example of the Gross Price Method
A company receives a $500 supplier invoice for office supplies, which contains within it a $20 discount if payment is made within 10 days of the invoice date. Under the gross price method, the entry is a $500 debit to the office supplies expense account and a $500 credit to accounts payable. This is usually made through a form in the accounts payable module of the firm’s accounting software, but the underlying journal entry would look like this:
If the accountant later decides to take the early payment discount, an additional entry is needed to record the $20 discount.