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 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.
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. However, given the issues noted here, the gross price method is used much more frequently than the net price method.