Net Purchases Formula

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 

Net Purchases =

Gross purchases- purchase discounts- purchase returns- purchase allowances

Definition of All the Elements in the Net Purchases Formula 

  1. Purchase discounts – Businesses receive purchase discounts if the supplier gives and businesses pay within a specified time limit.
  2. 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. 
  3. 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.

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