Net Purchases
Net purchases refer to the total cost of all purchases made by a business over a specified period, after deducting any purchase returns, allowances, and discounts.
Purchase returns are goods that are sent back to the supplier because they were damaged or incorrect. Purchase allowances are price reductions given by the supplier for damaged goods that the buyer agrees to keep. Purchase discounts are reductions in price given by the supplier for early payment of invoices.
The formula to calculate net purchases is:
Net Purchases = Total Purchases – Purchase Returns – Purchase Allowances – Purchase Discounts
In the context of inventory management, net purchases, when added to the beginning inventory and subtracted by the ending inventory, helps in determining the cost of goods sold (COGS), a key figure in assessing a company’s profitability.
Net purchases can be a useful measure for businesses to track as it can help in assessing purchasing activities and managing inventory more effectively.
Example of Net Purchases
Let’s consider a bookstore, BookWorld.
Over the course of a quarter, BookWorld made the following transactions:
- Total purchases (bought new books from publishers): $20,000
- Purchase returns (returned some damaged books): $1,000
- Purchase allowances (received a price reduction for some books that had minor damage but were kept): $500
- Purchase discounts (received a discount for paying some invoices early): $500
To calculate BookWorld’s net purchases for the quarter, we use the formula:
Net Purchases = Total Purchases – Purchase Returns – Purchase Allowances – Purchase Discounts
Substituting the given values:
Net Purchases = $20,000 – $1,000 – $500 – $500 = $18,000
So, BookWorld’s net purchases for the quarter amount to $18,000. This is the amount that will be considered for inventory valuation and calculation of the cost of goods sold (COGS) for the period.
