Definition: The gross method, opposed to the net method, records an invoice at full price without regard to any cash discounts offered. In other words, the gross method assumes that the customer will not take advantage of the cash or early payment discount. It records the invoice at the gross price and adjusts for the discount later if the discount was taken.
What Does Gross Method Mean?
Most businesses offer cash discounts to incentivize vendors to pay for their goods early. The most common discount term is 2/10, n/30. This means that if the vendor pays within 10 days of the invoice, it will get a 2 percent discount. Otherwise, the net amount is due within 30 days.
The gross method assumes that the discount will not be taken and records the purchase without regard to the discount. Let’s take a look at an example.
Bob’s Brewery purchases beer mugs from his supplier the first week of every month. This month’s order totals $10,000, but Bob’s supplier offers discount terms of 2/10, n/30.
If Bob recorded the purchase using the gross method, he would ignore the discount and record the purchase at its gross price by debiting inventory for $10,000 and crediting accounts payable for $10,000.
If Bob did make the 10-day deadline, he would then record the discount by reducing the inventory account. The adjusting entry would debit accounts payable for $10,000 and credit inventory for $200 and cash for $9,800.
If Bob didn’t take advantage of the discount, he wouldn’t have to make an entry. The purchase was originally booked at its gross price.
As you can see, the gross method saves a step for vendors who don’t plan to take any trade discounts. On the other hand, it creates an extra journal entry if they decide to pay their bill early.