What is the Purchase Credit Journal Entry?
Purchase Credit Journal Entry is the journal entry passed by the company in the purchase journal of the date when the company purchases any inventory from the third party on the terms of credit, where the purchases account will be debited. The creditor’s account or account payable account will be credited in the books of accounts of the company.
How to Record Journal Entry of Purchase Credit?
In the scenario when the company purchases the goods on credit from the vendor of the company, then the purchases account will get debited as it will lead to an increase in the inventory (assets) of the company. There will be corresponding credit in the accounts payable account as the amount for which purchases have been made is payable to the third party (vendor) in the future. The entry to be passed on recording the purchase on credit is as below:
The company pays cash against goods purchased on credit to the vendor. Thus the Accounts payable account debits as the liability gets settled with the corresponding credit to the cash accounts as there is the outflow of the cash to the vendor.
The entry for recording the payment against the purchase of goods on credit by the company is as follows:
Example of Purchase Goods on Credit Journal Entry
For example, there is company B ltd, which is having the business of manufacturing and selling the watches in the market on a large scale. On 1st July 2019, it purchased some goods from one of its vendors on credit worth $ 250,000. Company B ltd asked the credit period of 1 month from the party and agreed to pay the full amount after one month.
As per the credit terms, B ltd paid the full cash of $ 250,000 to the vendor on 1st August 2019. What journal entry will pass in the books of accounts to record the purchase of goods on credit and payment of cash against the purchase of those goods?
Solution
On 1st July 2019, when the goods were purchased on credit from the vendor, then the purchases account will be debited in the books of accounts with the amount of such purchase, and the corresponding credit will be there in the accounts payable account. The Entry for recording such Purchase on Credit is as below:
On 1st August 2019, when the amount is paid in cash against the purchase of goods on credit to the vendor, then the Accounts payable account will be debited with the corresponding credit to the cash accounts. The entry for recording such payment against the purchase made on credit is as below:
Advantages of Purchase Credit Journal Entry
- It helps in recording the transaction involving the purchase of goods on credit by the company from its vendor and ensuring the proper track of every credit Purchase involved.
- With the help of a purchase credit journal entry, the company can check the balance due to its vendor on any date.
Limitations of the Purchase Credit Journal Entry
- The recording of the purchase credit journal entry involves the intervention of the human, so there are chances that the person recoding such transaction commits a mistake. In that case, the wrong transaction will be shown in the company’s books of accounts.
- For the companies having the business on a large scale, the large number of transactions is involved, so in those cases, recording purchase credit journal entry for all transactions becomes time consuming, thereby increasing the chances of mistakes.
Important Points
- When the goods are purchased on credit from the vendor, then the purchase account will be debited, leading to an increase in the inventory as goods are bought from the third party.
- When the goods are purchased on credit from the vendor, then the accounts of the payable account will be credit in the books of accounts of the company. It is so because, with the credit purchase, the liability of the company increases, and this liability will be reflected in the balance sheet of the company until the same gets settle by repaying the amount against such purchases back to the vendor.
Conclusion
Purchase credit journal entry is recorded in the books of accounts of the company when the company purchases the goods on credit from the third party (vendor). At the time when the purchases are made on credit terms, then the purchases account will be debited in the books of accounts of the company which will be shown in the income statement of the company and the accounts payable account will be debited because, with the credit purchase, the liability of the company increases and this liability will be reflected in the balance sheet of the company until the same gets settle by repaying the amount against such purchases back to the vendor.
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