What is Purchase Journals?
Purchase journals are special journals used by an organization to keep track of all the credit purchases. It is also known as Purchase book or Purchase daybook. While credit transactions are recorded in Purchase book, cash purchases are entered in a general journal. It is worth mentioning that only the credit purchase of goods is recorded in such journals and any capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more is excluded.
Most organizations have a separate purchase department which takes care of the complete process of purchasing which are the identification of required goods, classification, asking quotation, placing the order and confirming the receipt of goods matching to the desired description.
Components of Purchase Journal Entry
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For eg:
Source: Purchase Journals (wallstreetmojo.com)
#1 – Two parties
In every purchase, there are two parties, a buyer and a seller. Both parties agree to a price that is paid by the purchaser in consideration of goods or services. This purchase price is the transaction amount for all purchase journals. The person or organization from whom the purchase is made is called Supplier and when the purchase in on credit, the Supplier will appear as Creditors in the balance sheetBalance 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 till the time payment is made.
#2 – Credit Purchase
An organization acquires various goods and services from multiple Suppliers. When good is purchased on credit the following journal entry is posted – Let’s say X Ltd. purchased $500 worth goods from Y Ltd. –
When payment is made –
#3 – Invoice
Invoice is a document that is issued by the seller to the purchaser. It is a detailed document. It contains the date of invoice, name, and address of Supplier, name of the organization to which it is billed, address and name of the organization where the goods ship, quantity and description of the goods, payment method needed by suppler, the currency of the invoice, taxes, etc. Invoice is an important document, which is an issue along with goods, and when it reaches the purchaser, the purchaser will match the goods arrived with Purchase Order placed.
#4 – Purchase Department
Most organizations have a separate purchase department which is responsible for the procurement of good. So, when any person or department needs any goods, they have to send a request to the Purchase department, if the goods are already available in the stock or warehouse, the purchase department will issue the goods. If the goods are not available, the purchasing team will identify the Supplier who specializes in needed goods, and they will place the order. Once the order has arrived, they will check that it matches the required description, and quantity is matching to what was requested. Once the purchasing department confirms that goods have been received, the invoice goes to accounts for payment.
#5 – Credit Note
In cases where the goods supplied do not match the description, have quality issues or damage, and Purchaser has to return it to the Supplier. Then the Supplier will issue a document called Credit Note, which will be adjusted against the payments of goods in the future. Let’s say X Ltd. returned good worth $1,000, and Y Ltd. issued a credit note for that value. Next time when X Ltd. will purchase of $5,000, it only has to pay $4,000 as $1,000 will be adjusted against credit noteCredit NoteA credit note is a commercial instrument issued by the seller of goods and services to the purchaser if the goods and services are returned to him by the purchaser, informing him that the purchaser's account is credited in the seller's books of accounts.read more.
#6 – Purchase Book
The purchase book records all the credit purchases in one place, and details of Suppliers, invoice number, currency, quantity, and other details are mentioned there. The balances for these Suppliers from Purchase book are transferred to individual ledgers and a total of expense heads is debited to an expense accountExpense AccountExpense accounting is the accounting of business costs incurred to generate revenue. Accounting is done against the vouchers created at the time the expenses are incurred.read more. This is one of the basics books in the book-keeping process, which is essential in preparing ledger balancesPreparing Ledger BalancesLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. read more, trial balance, and final accounts. Below is a sample purchase book XYZ Ltd for August 2019. In this case, the balances of $500, $1,000 and $2,000 will be posted to individual ledgers of Nike, Adidas and PUMA Ltd. Also, the Purchase account will be debited by $3,500.
Advantages of Purchase Journals
- The details of all the suppliers are found in one place which helps in reconciling ledger balances and trial balance
- Easy to maintain and track data for Supplier analysis
- The total credit purchase and type of purchase is found at one place
- An essential document for the smooth functioning of the purchasing department
- During year-end audits, finding the invoice numbers related to any Suppliers becomes accessible from purchase journals
- One of the famous and widely maintained books
Disadvantages of Purchase Journals
- A separate accountant is needed which costs time and money
- If the wrong supplier account is selected in the purchase book, it leads to error in the preparation of trial balance and final accountsFinal AccountsFinal Accounts is the final stage of the accounting process, in which the various ledgers maintained in the Trial Balance (Books of Accounts) of the organization are presented in the specified way to provide the profitability and financial position of the entity for a specified period to stakeholders and other interested parties, i.e. Trading Account, Statement of Profit & Loss, Balance Sheet, and so on.read more
Conclusion
Purchase journals are a vital and essential part of the accounting process of any organization. When implemented carefully, a sound system will help in just in time purchases, which will lead to saving in time and money. Also, the purchase analysis extracted from these journals helps in the negotiation of new contracts. Purchase journals also help in Creditors management, tracking returned goods status, credit notes, and updated ledger balancesLedger BalancesA ledger balance is an opening balance that remains available during the start of each business day. It comprises of all the deposits and withdrawals, used in the calculation of the total funds left in an account at the end of the previous day.read more of Suppliers, all of which are required for a business to be successful and up to date. It also helps in audit facilitation by providing the data needed by auditors.
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