Final answer:
Purchase discounts are recorded under a periodic inventory system when payment is made within the supplier's discount period, reducing both Accounts Payable and Purchases.
Step-by-step explanation:
Under a periodic inventory system, purchase discounts are usually recorded when payment is made to the supplier within the discount period. The discount period is typically defined by terms provided by the supplier and can be seen on the invoice. When a company pays the invoice within this timeframe, it records the discount by reducing both the accounts payable and the purchases accounts, reflecting the cost savings gained from paying early.
The journal entry to record a purchase discount under a periodic system typically involves debiting Accounts Payable for the full invoice amount, crediting Cash for the amount paid, and crediting Purchases (or Purchase Discounts) for the discount amount. This entry reduces the cost of purchases on the income statement by the amount of the discount, which ultimately affects the cost of goods sold (COGS) and, therefore, the gross margin.