Recording Purchase Transactions | Accounting for GCSE/IGCSE - Year 11 PDF Download

Cash Purchases

What is a cash purchase?

• A cash purchase occurs when a business pays a supplier upfront for goods or services rendered.
  • The supplier provides the business with a receipt, serving as the official document for the transaction.
• The cash book functions as the primary record for cash transactions.

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

• Credit the cash or bank account in the nominal ledger, reflecting the cash expenditure by the business.
  • This is necessary because the business is disbursing cash, resulting in a decrease in assets.
• Debit the purchases account in the nominal ledger, indicating the acquisition of goods or services.
• Notably, no entries are made in the trade payables accounts since the goods or services were promptly paid for, thereby eliminating any indebtedness to the supplier.

Credit Purchases

What is a credit purchase?

• A credit purchase occurs when a business defers payment to a supplier for goods or services received.
• The business receives an invoice from the supplier, which serves as the official documentation for the transaction.
• The purchases journal serves as the primary record for credit purchases.

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

• Credit the trade payable account in the purchases ledger, indicating the business's obligation to pay the credit supplier.
  • This reflects an increase in liability as the business owes money to the supplier.
• Debit the purchases account in the nominal ledger, signifying the acquisition of goods or services on credit.
• Notably, no entries are made in the cash or bank accounts since no cash has been exchanged at this stage.

Payments from Credit Customers

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

• Credit customers have various options to settle invoices, such as:
  • Cash payment
  • Payment by cheque
  • Bank transfer
  • Telephone transfer
• Transactions involving cheques and transfers are meticulously recorded in the company's bank account.
• Essential business documents like bank statements, cheques, and receipts play a significant role in these transactions.
• The cash book serves as the primary record-keeping tool for these financial activities.

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 action is taken because the business is utilizing funds.
  • It signifies a decrease in assets as cash or bank balance is reduced.
• Debit the trade payable account in the purchases ledger:
  • This step is necessary as the business reduces its outstanding debt to the supplier.
  • It indicates a decrease in liability as the business owes less money to the supplier.

Discount Received

What is discount received?

• A business may receive a cash discount from a credit supplier for promptly settling an invoice.
• This discount differs from a trade discount and is specifically offered by the credit supplier.
• The discount received is documented on the purchase invoice, which serves as the official record for the transaction.
• The terms of the cash discount, including the rate and conditions, will be outlined on the purchase invoice.
• The cash book serves as the primary record for accounting entries related to cash transactions.

How do I record discount received in the ledger accounts?

• Debit the trade payable account in the purchases ledger:
  • This action is taken because the business is reducing its outstanding debt to a credit supplier.
  • It indicates a decrease in liability as the business owes less money to the supplier.
• Credit the discount received account in the nominal ledger:
  • This step involves crediting the account designated for recording discounts received.
  • Typically, this transaction is recorded simultaneously with the payment transaction.
  • It ensures accurate accounting by ensuring that the total debits equal the total credits in the ledger entries.

Purchases Returns

What is a purchase return?

• A purchase return occurs when a business returns goods to a supplier due to reasons such as:
  • The goods being damaged or defective.
  • The goods not meeting the business's requirements or expectations.
• The supplier issues a credit note to the business, serving as the official document for the return transaction.
• The purchases returns journal is the primary record-keeping book for documenting purchase returns.

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

• Debit the trade payable account in the purchases ledger:
  • This action is necessary because it reduces the amount owed by the business to the credit supplier.
  • It indicates a decrease in liability as the business owes less money to the supplier.
• Credit the purchases returns account in the nominal ledger:
  • This step involves crediting the account designated for recording purchases returns.
  • If the business has settled all invoices in full, the trade payable account may carry a debit balance, indicating that the business is owed money by the supplier.
  • This balance will be offset when the business receives a cash refund, thereby balancing the account.