Purchase Credit Journal Entry (Definition)

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 any inventory is purchased by the company from the third party on the terms of credit, where the purchases account will be debited and the creditors 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 goods are purchased by the company on credit from the vendor of the company then the purchases account will get debited as it will lead to increase in the inventory (assets) of the company and 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 future. The entry to be passed in order to record the purchase on credit is as below:

Now, when the cash is paid by the company against the good purchased on credit to the vendor then the Accounts payable account will be debited as the liability of the company is getting settled off with the corresponding credit to the cash accounts as there is the outflow of the cash out of the company to the vendor.

The entry for recording the payment against the purchase of goods on the credit by the company is as follows:

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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 1^st July 2019, it purchased some goods from one of its vendor 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 1 month.

As per the credit terms, B ltd paid the full cash of $ 250,000 to the vendor on 1^st August 2019. What will be the journal entry to be passed in the books of accounts of the company to record the purchase of goods on credit and for recording the payment of cash against the purchase of those goods?

Solution

On 1^st 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 1^st 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 each and 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, 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 transaction becomes time consuming thereby increasing the chances of mistakes.

Important Points

When the goods are purchased on credit from the vendor then purchases an account in the books of accounts of the company will be debited leading to an increase in the inventory of the company as goods are bought from the third party.
When the goods are purchased on credit from the vendor then the accounts the payable account will be credit in the books of accounts of the company. This 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 goods are purchased by the company 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, liability of the company increases and this liability will be reflected in the balance sheet of the company until the same gets settles by repaying the amount against such purchases back to the vendor.