Net Purchases Formula Definition
Net purchases formula refers to the entire amount of items a business purchases after specific deductions. These deductions include discounts, allowances, and returns on purchases. All of this is a representation of transactions between a business and the suppliers it uses.
Significance of Net Purchases Formula in an E-Commerce Business
Net purchases formula is essential for companies to track how much money they have spent on buying goods. It helps companies to:
- Identify issues related to discounts and returns
- Understand company’s financial health
- Decide the product’s pricing
Applications of the Net Purchases Formula
The main application of the net purchases formula can be seen in accounting as it helps track total sales growth.
- It gives an accurate idea of a company’s expenses.
- The formula shows how much sales revenue a company is bringing in.
- Companies can identify if customers are returning products at a higher rate than average.
Net Purchases Formula
Definition of All the Elements in the Net Purchases Formula
- Purchase discounts – Businesses receive purchase discounts if the supplier gives and businesses pay within a specified time limit.
- Purchase returns- Any items returned by the business to the supplier fall under purchase returns. This usually includes faulty, damaged items or there is surplus.
- Purchase allowances- When suppliers reduce prices for some reason, usually for damaged products, they are filed under purchase allowances.
How Can You Use the Net Purchases Formula to Calculate a Business’ Turnover Ratio
If a company has a gross purchase amount of ₱300 million, its purchase discounts are ₱40 million, purchase returns are ₱25 million, and purchase allowances are ₱35 million, then its net purchase amount will be
₱300 million- ₱30 million- ₱10 million- ₱20 million = ₱240 million.
What Can You Infer from the Net Purchases Formula?
The net purchases formula overviews the company’s net income from sales and measures total revenue growth.