 Hello in this lecture we're going to be talking about a purchase discount. We will be the owner on the left hand side of this transaction. We are purchasing inventory from the vendor on the right hand side of the transaction. The discount in this case will be going from the vendor to the owner. So the owner us we're getting a discount on the purchase that we are making. The new thing here are going to be the terms of the discount, which are in this case 2 slash 10 and slash 30. What does that mean? Means there's a 2% discount if we pay within 10 days, otherwise we're going to pay within 30 days. Why would the vendor give us those terms? They would be trying to increase their cash flow. So they'd say usually you have to pay normally within 30 days. If you pay us within 10 days, we'll give you this 2% discount. When we record the original transaction, we don't even really need to know the term. So it can be confusing when we're looking at a problem. We see these terms that can be very confusing. And then we don't even use the terms when we make the original transaction. Why? Because we're going to post it as the full price in terms of the full sales price. And then if we pay within that 10 days time period, then we're going to have to account for the discount that we will be receiving. So even though we have terms, we're going to post it as if we don't have terms on the original transaction, which would be a journal entry of an increase to inventory for the inventory at 6500 and an increase to the accounts payable representing that we owe the vendor that 6500 would look something like this. It would be the debit to merchandise inventory, credit to payable that we have seen before increasing the merchandise inventory and increasing the liability. Then if we make the time period, the payment within that discounted time period, we're going to pay within 10 days. In this case, now we have to worry about that purchase discount. Now the vendor is going to say, all right, you don't have to pay us that 6500 in essence, reducing that IOU by that discounted amount. So we're going to reduce the IOU, which of course will reduce the amount of payment amount of cash that we will then be paying to the vendor. The other thing that's less intuitive is that the ink is going to go down. The inventory is going to go down. That can be confusing because on every problem, they're going to have the sales discount account there. And that's the discount that we give to our customers, not the discount that we are receiving from the vendor. What happened here is that we overstated the amount that we reported on inventory at 6500. It didn't cost us 6500 because now we've got a discount. So we've got to reduce the inventory in this case. Journal entry. We're going to say that accounts payable are going to go down and we're going to reduce the inventory. So let's take a look at that first calculating what that discount will be. So let's calculate how much payment we will have to pay if after the discount. We have a 2% discount if we pay within 10 days. We paid within 10 days. Let's calculate the discount original amount 6500. The discount is 2%. Therefore 6500 times 2% means we're not going to pay 130 the discounted amount. That means that the sales price minus the discounted amount is what we will pay 6,370. Now there's a quicker way to get to this 6,370 and this is very useful for normal kind of calculations if we go and we're calculating a sale on something and seeing how much we're going to pay in terms of a sale that we're making a purchase on. It would be 6,500 and then we're going to say minus or times 1 minus the discounted rate or 100% minus the 2% meaning that if we're not going to pay 2% we are going to pay 100% minus 2% or 98% and that means we're going to pay 6,500 times 98% and we get to that same 6,370. 6,370 being what we're going to pay after the discount. Now we can record this transaction and we're going to record the transaction up on the left hand side. We'll post it to the trial balance on the right hand side. First thinking about the cash. Cash is going to go down by the amount that we will then pay 6,370. So we're going to record that out. We're at a debit of 120,000 minus a credit of 6,337 brings cash down to 113,630. Normally the other side of the transaction is accounts payable. We'll be in this case as well, but it won't be for the amount of cash we paid. It will be for the entire amount that is owed for this particular debt meaning that 6,500. Why? Because we're basically reducing it by the amount of a discount and now by the amount of the cash that we're going to pay. So we have to take the entire amount off the books. If we do not do that, then we're going to be left with the discount on the books representing that we still owe that and we don't owe that. So we need to take it off the books. So we're going to debit that bringing it down to zero. Now we need a plug and we know that that plug is going to be the amount of the discount. And again, because it's the amount of the discount that we're receiving every problem you're going to see and you're going to say, Hmm, I see sales discount. Why don't we post it to sales discount? And the reason we don't post it to sales discount is because that's the discount that we give to our customers. And one of the reasons that's kind of confusing is because this sales is called our revenue account. When we're merchandising companies, sales is revenue. Sales is our income account. And therefore the term sales discount is really basically revenue discount that we're giving to the customer. It's not like a sales discount that we get on a sale if we're going to the store kind of thing. So we're giving a purchase discount in this case. And the account we're going to won't have the word discount at all. And it'll have merchandise inventory in it. Why? Because we overstated the merchandise inventory by that 6,500. What we put it on the books for, we're not paying 6,500 for it. We're only paying 6,370. Therefore we need to reduce it by that discounted amount of the 130. So that's the most confusing part, the place where most people get confused. We're reducing the inventory, bringing the inventory down to 11,370 in this case. That means that assets went down by the cash, also went down by the discount, liabilities went down, no effect on equity, meaning there's no effect on the income statement.