 Hello in this lecture we're going to define purchase discount according to fundamental accounting principles while 22nd edition the definition of purchase discount is term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period. So we are talking about a discount when we talk about discounts question is often are we receiving the discount are we giving the discount are we the purchaser or are we the seller. This discount definition is in terms of the perspective of the purchaser term used by the purchaser to describe the cash discount granted to the purchaser. So in this perspective we are the purchaser we're receiving a cash discount possibly from buying something like inventory from the seller from the vendor. Let's take a look at a transaction. We are the owner over here on the left hand side. We have the vendor on the right hand side. We are purchasing inventory 6500 worth of it on account meaning we are giving for that inventory in IOU we're going to pay within the future terms may look something like this to slash 10 in slash 30 meaning we get a 2% discount if we pay within 10 days otherwise we pay within 30 days. This 6500 is the sticker price when we first record the transaction typically we're going to put it on at the entire full price 6500 then deal with this discount if we pay within the discounted period of in this case 10 days. Therefore a journal entry would do something like this increase inventory by 6500 and increase the accounts payable by that same 6500 the amount before the 2% discount as if we paid within 30 days not necessarily within 10 days then the transaction would look something like this this would be just a recording of this transaction 6500 increasing the inventory and increasing the accounts payable. If we then paid within the discounted time period we would then have the purchase discount that would be granted from the vendor to us the owner to the purchaser in this case and we would have the 6500 would be reduced meaning we would reduce the amount of the IOU because we're going to get that 2% discount because we paid within the discount period of 10 days that means we're also going to reduce the amount of cash that we're going to have to pay. We have the IOU on the books at 6500 we're going to have to actually reduce that IOU which will reduce the amount that is eventually paid confusing thing about this transaction for most students is that the other side of the transaction is we're going to have to reduce the inventory we put the inventory on the books at 6500 however we didn't actually pay 6500 for it now we got to say that we're going to pay 2% less of that reduce the inventory that is on our books therefore journal entry reducing accounts payable would reduce the inventory basically reducing the amount of cash that we're going to have to pay of course at the time that we pay if we're paying within that discounted time period.