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    I believe that every business organization uses inventory for generating sales. If an organization manufactures products by using raw material instead of offering service then he needs to prepare accounting records for inventory. Inventory can be purchased in two ways- on cash (or) credit. In this qRead more

    I believe that every business organization uses inventory for generating sales. If an organization manufactures products by using raw material instead of offering service then he needs to prepare accounting records for inventory. Inventory can be purchased in two ways- on cash (or) credit.

    In this question, I would like to tell you about inventory purchased on credit. Starting with its meaning followed by Journal Entry and a simple practical problem.

    Purchased Inventory on Credit

    When an organization purchases raw materials for manufacturing finished products from another organization on agreed terms that consideration (price or value) of raw materials (Inventory) will be paid on some future date then it is called Credit Purchase of Inventory.

     Journal Entry for Inventory purchased on credit

    1. Modern Accounting Approach

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st FebInventory- Raw material a/c1,00,000AssetDebit- The Increase in Asset.
     To Accounts Payable/Supplier a/c 1,00,000LiabilityCredit- The Increase in Liability.

    2. Traditional Accounting Approach

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st FebInventory- Raw material a/c1,00,000RealDebit- What comes into the business.
     To Accounts Payable/ Supplier a/c 1,00,000PersonalCredit- The giver.

    Practical Example

    On 1st May Alexa Co., a manufacturer of sofa sets, purchases hardwood from Anna Co. for 5,00,000 on a credit period of 2 months. Journalise the following transaction in the books of Alexa Co.
                                                                 In the books of Alexa Co.

    1. When Inventory is purchased on credit from Anna Co.-

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st MayInventory- Raw material a/c5,00,000AssetDebit- The Increase in Asset.
     To Accounts Payable/ Anna Co. a/c 5,00,000LiabilityCredit- The Increase in Liability.

    (Being Inventory purchased on credit).

    2. When the consideration (price or value) of Inventory is duly paid-

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st AugAccounts Payable/ Anna Co. a/c5,00,000LiabilityDebit- The Decrease in Liability.
     To Cash/Bank a/c 5,00,000AssetCredit- The Decrease in Asset.

    (Being consideration duly paid on the due date).

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