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Emin Radwan

What is the journal entry for purchased goods on credit?


1 Answer

  1. This answer was edited.

    It is believed that every organization requires goods for running its business. Goods can be purchased in two different ways- on cash and credit. Most of the companies prefer credit purchase of goods over cash. I would like to explain to you the meaning of credit purchases followed by journal entry and simple practical example.

    Purchased Goods on Credit

    In simple terms, when an organization (or) customer purchases the goods from the seller (or) supplier and agrees to pay the consideration (value or price) of the goods on some future date then it is called as credit purchases. Whenever credit purchase takes place accounts payable account/sundry creditor is created.

    Accounts payable increases when the organization keeps on purchasing goods on credit. It is considered as a short-term debt that an organization owes to another organization during the ordinary (or) normal course of business.

    Journal Entry for goods purchased on credit

    • Modern Accounting Approach-
    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st MarchPurchases a/c25,000ExpenseDebit The Increase in Expense
     To Accounts Payable/Supplier a/c 25,000LiabilityCredit– The Increase in Liability.
    • Traditional Accounting Approach
    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st MarchPurchases a/c25,000NominalDebit All expenses and losses.
     To Accounts Payable/Supplier a/c 25,000PersonalCredit The giver.

     Practical Example

    On 1st June, Alex Co. purchases goods from Max Co. for 2,00,000 on credit period of 30 days. Pass Journal entry for credit purchases in the books of Alex Co.
                                                                In the Books of Alex Co.

    1. When Credit Purchase of goods takes place-

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st JunePurchases a/c2,00,000ExpenseDebit- The Increase in Expense.
     To Accounts Payable/Max Co. a/c 2,00,000LiabilityCredit- The Increase in Liability.

    (Being goods purchased from Max Co. on credit).

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

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    1st JulyAccounts Payable/Max Co. a/c2,00,000LiabilityDebit- The Decrease in Liability.
     To Cash/Bank a/c 2,00,000AssetCredit- The Decrease in Asset.

    (Being consideration paid for the goods purchased on credit).

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