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 Purchase journals, any capital expenditure is excluded from Purchase journals. 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
Below are components of Purchase journals Entry
#1 – Two parties
In every purchase, there are two parties, a buyer and a seller. When both the parties agree to a price which has to be paid by the purchaser in consideration of goods and/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, Supplier will appear as Creditors in the balance sheet till the time payment is made.
#2 – Credit Purchase
An organization acquires various good and services from various 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. –
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When payment is made –
#3 – Invoice
Invoice is a document which is issued by the seller to the purchaser. It is a detailed document which contains 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 are shipped, quantity and description of the goods, payment method needed by suppler, currency of invoice, taxes levied and other details. 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 Purchase department, if the goods are already available in the stock or warehouse, 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 damaged 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 note.
#6 – Purchase Book
Purchase book records all the credit purchases at 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 account. This is one of the basics books in the book-keeping process which is essential in preparing ledger balances, trial balance, and final account. Below is a sample purchase books XYZ Ltd for the month of 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, 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 easy from purchase journals
- One of the popular 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 accounts
Conclusion
Purchase journals are a very important and essential part of the accounting process of any organization. When implemented carefully, a good Purchase journal system will help in just in time purchases, which will lead to saving in time and money. Also, the purchase analysis extracted from Purchase journals helps in the negotiation of new contracts. Purchase journals also help in Creditors management, tracking returned goods status, credit notes and updated ledger balances of Suppliers, all of which is required for a business to be successful and up to date. It also helps in audit facilitation by providing the required data by auditors.
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