Under the net method of recording accounts payable, an organization records supplier invoices at the amount that will be paid after any early payment discounts have been applied. This differs from the standard approach, under which the full amount of each supplier invoice is initially recorded, with any early payment discounts being recorded only when payment is eventually made. If the recording entity does not pay for the invoice by the date needed to allow for a discount, then the amount of the discount must be added back to the supplier invoice amount, which requires an additional journal entry.
The net method is more theoretically correct than standard practice, since all effects associated with a supplier invoice are recorded within the same reporting period, so that the full effect of the invoice impacts the financial statements within a single period. However, if a business cannot reliably pay within discount terms, it should not use the net method.
When recording a supplier invoice under the net method, the entry is a debit to the relevant expense or asset account, and a credit to the accounts payable account, using the net price. If the discount is not taken, this requires a later entry to charge the purchase discounts lost account (which is an expense account).