Recording Purchase Transactions

Cash purchases

Cash purchases

What is a cash purchase?

• A cash purchase is when the business pays the supplier upfront for goods or services

• The supplier issues the business with a receipt

  • The receipt is used as the business document

• The book of prime entry is the cash book

How do I record a cash purchase in the ledger accounts?

• Credit the cash or bank account in the nominal ledger

  • This is because the business is spending cash

  • The asset is decreasing

• Debit the purchases account in the nominal ledger

  • This is because the profit is decreasing

  • The capital is decreasing

Credit purchases

Credit purchases

What is a credit purchase?

• A credit purchase is when a business pays a supplier later for goods or services

• The business will receive an invoice from the supplier

  • The invoice is used as the business document

• The book of prime entry is the purchases journal

How do I record a credit purchase in the ledger accounts?

• Credit the trade payable's account in the purchases ledger

  • This is because the business owes money to the credit supplier

  • The liability is increasing

• Debit the purchases account in the nominal ledger

  • This is because the profit is decreasing

  • The capital is decreasing

Payments to credit suppliers

Payments to credit suppliers

How could a business pay an invoice to a credit supplier?

• A business could pay by:

  • Cash payment

  • Cheque

  • Bank transfer

  • Telephone transfer

• Cheques and transfers are recorded in the bank account

• Bank statements, cheque counterfoils, and receipts are used to record these payments

• The book of prime entry is the cash book

How do I record a payment to a credit supplier in the ledger accounts?

• Credit the cash or bank account in the nominal ledger

  • This is because the business is spending money

  • The asset is decreasing

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes the supplier less money

  • The liability is decreasing

Discount received

Discount received

What is discount received?

• A business might be offered a cash discount by a credit supplier for early repayment of an invoice

  • This is not a trade discount

• The business is receiving a discount from a credit supplier

• The book of prime entry is the cash book

How do I record discount received in the ledger accounts?

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes less money to a credit supplier

  • The liability is decreasing

• Credit the discount received account in the nominal ledger

  • This is because the profit is increasing

  • The capital is increasing

• You will normally have to record the transaction for a payment at the same time

  • Make sure that the sum of the debit entries equals the sum of the credit entries

Dishonoured cheques issued to credit suppliers

Dishonoured cheques issued to credit suppliers

What is a dishonoured cheque?

• A dishonoured cheque is a cheque that has been returned by the bank

  • This could be because the business did not have the funds to cover the transaction

  • Or it could be due to an error on the cheque such as a missing signature

• This means that the money stated on the cheque has not been paid to the supplier by the business

How do I record a dishonoured cheque in the ledger accounts?

• A dishonoured cheque is recorded by making the same entries as when the cheque was received but on the opposite sides of the accounts

• Debit the bank account in the nominal ledger

  • This is because the bank account would have been credited when the cheque was issued

  • Debit the amount that is stated on the cheque

• Debit the discount allowed account in the nominal ledger

  • If a cash discount was received from the credit supplier then this also needs to be balanced

  • The discount received account would have been credited when the cheque was issued

• Credit the trade payable's account in the purchases ledger

  • This is because the trade payable's account would have been debited when the cheque was issued

  • The amount is added back onto the balance of the credit supplier

  • Credit the full amount of the transaction including any cash discount

Purchases returns

Purchases returns

What is a purchase return?

• A purchase return is when a business returns some goods to a supplier

• This could be because:

  • The goods were damaged

  • The goods were not what the business wanted

• The business will receive a credit note from the supplier

  • The credit note received is used as the business document

• The book of prime entry is the purchases returns journal

How do I record a purchase return in the ledger accounts?

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes less money to a credit supplier

  • The liability is decreasing

• Credit the purchases returns account in the nominal ledger

  • This is because the profit is increasing

  • The capital is increasing

• If the business has already paid all of their invoices in full

  • Then the trade payable account will have a debit balance

  • This means the business is owed money from the supplier

  • This will be balanced when the business receives a cash refund

Refunds from credit suppliers

Refunds from credit suppliers

When is a refund received from a credit supplier?

• A refund may be received from a credit supplier

  • when there is a debit balance on the supplier account

  • if the business has overpaid for their goods

  • if the business has returned goods after paying for them

How do I record a refund in the ledger accounts?

• Debit the bank account in the nominal ledger

  • This is because the business is receiving money from the customer

  • The asset is increasing

• Credit the trade payable's account in the purchases ledger

  • This is to reduce how much the business is owed by the supplier

  • The liability is decreasing