Purchase Discounts Lost
“Purchase Discounts Lost” refers to the additional amount paid by a buyer because they did not take advantage of the early payment discount offered by the seller. Essentially, it’s the amount a buyer could have saved if they had paid their invoice within the discount period.
Example of Purchase Discounts Lost
Suppose a business, Shop X, orders a batch of products from a supplier, Supplier Y, for $5,000. Supplier Y offers a purchase discount term of 3/15, net 45. This means that if Shop X pays within 15 days, they can avail a 3% discount. The total payment without the discount is due in 45 days.
Now, the potential discount if paid within 15 days is:
3% of $5,000 = $150
If Shop X pays within 15 days, they would pay:
$5,000 – $150 = $4,850
However, suppose Shop X doesn’t manage to pay within 15 days, and instead makes the payment on the 20th day. This means they missed the discount period and had to pay the full invoice amount of $5,000.
In this case, the Purchase Discount Lost for Shop X is the $150 that they could have saved if they had paid the invoice within the 15-day discount period. Shop X might want to record this $150 in their accounting records as a lost discount to help evaluate their payment practices and consider if they need to make changes to take better advantage of such discounts in the future.