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corporatefinanceinstitute.com
48
The Corporate Finance Institute
Accounting
Gross Method 
Purchase Date
DR Inventory: 100,000
CR Accounts Payable: 100,000
If discount taken
DR Accounts Payable: 100,000
CR Cash: 98,000
CR Inventor: 2,000
If discount not taken 
DR Accounts Payable: 100,000 
CR Cash: 100,000
Net Method
Purchase Date
DR Inventory: 98,000
CR Accounts Payable: 98,000
If discount taken
DR Accounts Payable: 98,000
CR Cash: 98,000
If discount not taken 
DR Accounts Payable: 98,000 
DR Purchase discounts lost (expense): 2,000 
CR Cash: 100,000

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corporatefinanceinstitute.com
49
The Corporate Finance Institute
Accounting
Warranties 
When companies issue warranties, it is a guarantee that its products 
will be free from defects for a specified period of time. When 
manufacturers offer warranties, the warranty obligation is recorded as 
a provision for warranty payable or a warranty liability account. Once 
these warranty obligations have been performed, they are reduced in 
the liability account. 
Example
In 2017, XYZ Company sold $100 million in cars and provides a 3-year 
warranty on each car. The company estimates that 4% of total sales will 
equal to warranty obligations. In 2018, the company met $900,000 of its 
warranty obligations or $500,000 for parts and $400,000 for labor. 
2017
DR Warranty Expense: 4,000,000
CR Warranty Payable: 4,000,000
2018
DR Warranty Payable: 900,000
CR Inventory: 500,000
CR Wages Payable: 400,000