What is the effect of a purchase discount on the buyer's books?

• A. Debit Inventory; Credit Cash; Debit Purchase Discounts for the discount.
• B. Debit Accounts Payable; Credit Cash; Credit Purchase Discounts for the discount.
• C. Debit Cash; Credit Accounts Payable; Debit Purchase Discounts.
• D. Debit Purchases; Credit Cash; Credit Purchase Discounts for the discount.

Answer: (B)

The key idea is how a cash discount on a purchase is recorded when payment is made within the discount period. When you pay, you settle the liability for the full invoice amount, so you debit the Accounts Payable for that full amount. You also decrease your cash by the actual amount paid, so you credit Cash. The discount itself is recognized by crediting Purchase Discounts, a contra-expense account that offsets the cost of purchases. This sequence shows the liability being cleared, cash outflow reduced by the discount, and the savings from the discount reflected in the Purchase Discounts account, which ultimately lowers the cost of purchases recorded.