Purchase Credit Journal Entry

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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. The purchases account will be debited. The creditor’s account or account payable account will be credited to the company’s books of accounts.

How to Record Journal Entry of Purchase Credit?

In the scenario when the company purchases the goods on credit from the company’s vendor, then the purchases account will get debited as it will lead to an increase in the inventory (assets) of the company. As a result, 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. Therefore, the entry to be passed on recording the purchase on credit is as below:

Particulars Dr ($)Cr ($)
Purchase  A/C …..DrXXX 
                   To Accounts Payable  A/C XXX

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 cash outflow to the vendor.

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

Particulars Dr ($)Cr ($)
Accounts Payable A/C …..DrXXX 
                   To Cash  A/C XXX

Example of Purchase Goods on Credit Journal Entry

For example, there is company B ltd, which is manufacturing and selling 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 for a credit periodFor a Credit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy.read more of 1 month from the party and agreed to pay the full amount after one month.

As per the credit termsCredit TermsCredit Terms are the payment terms and conditions established by the lending party in exchange for the credit benefit. Examples include credit extended by suppliers to buyers of products with terms such as 3/15, net 60, which essentially implies that although the amount is due in 60 days, the customer can avail a 3% discount if they pay within 15 days.read more, 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, 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:

Entry 1

On 1st August 2019, when the amount is paid in cash against the purchase of goods on credit to the vendor, 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:

Entry 2

Advantages of Purchase Credit Journal Entry

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 recording such a 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, many transactions are involved, so in those cases, recording purchase credit journal entries for all transactions becomes time-consuming, thereby increasing the chances of mistakes.

Important Points

  • When the goods are purchased on credit from the vendor, the purchase account will be debited, increasing the inventory as goods are bought from a third party.
  • When the goods are purchased on credit from the vendor, then the accounts of the payable account will be credited to the company’s books of accounts. It is so because, with the credit purchase, the company’s liability increases, and this liability will be reflected in the company’s balance sheet until the same gets settled by repaying the amount against such purchases back to the vendor.

Conclusion

Purchase credit journal entry is recorded in the company’s books of accounts when the company purchases the goods on credit from a third party (vendor). 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 company’s income statement. The accounts the payable account will be debited because, with the credit purchase, the company’s liability increases, and this liability will be reflected in the company’s balance sheetCompany's Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more until the same gets settled by repaying the amount against such purchases to the vendor.

This article has been a guide to Purchase Credit Journal Entry. Here we discuss the most common example of a journal entry of purchasing goods on credit and explanations, advantages, and disadvantages. You can learn more about accounting from the following articles –

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