Purchase Accounting

Purchase Accounting

In this article we would explain purchase accounting or accounting for purchases. Purchases are expenses for the organization. Purchases are recorded on the bases of Purchase Bill (Purchase invoice is primary document for Purchase recording).

Purchases are recorded in General journal by debiting Purchase and crediting Cash or payable account (as case may be). There are two possible ways or methods of maintain Purchase recording.

a)    All Purchase (Cash & Credit) are recorded in General Ledger.

b)   Credit Purchase recorded in Purchase Day book (Large organization).

1.   General Journal Purchase Accounting Method

With help of an example, we have explained the recording in General Journal, and then posting into General Ledger. This method is chosen by small scale organization, which has limited Purchase transaction.

Purchase Accounting Example

Cash Purchase= 10,000

Credit Purchase from Saleem Khan = 20,000

Record the transaction General Journal & General Ledger?

Recording in General Journal

The purchases are debited being the expense for the organization and cash is credited in first entry due to decrease in asset. In second entry Saleem account is credited due to increase in liability/payable.

Date	Particulars	Dr	Cr
	Purchases A/c	10,000
	Cash		10,000

Date	Particulars	Dr	Cr
	Purchases A/c	20,000
	Saleem Khan A/c		20,000

Posting in General Ledger

In above two entries , there are three account involved i.e. purchases, cash and Saleem khan. Purchases were debited in journal, therefore it will transfer to debit side of purchase account,while cash and saleem khan were credited in journal entry, therefore credit side of these account will effect.

                                                  Purchase Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Cash	10,000		Profit & Loss	30,000
	Saleem	20,000
		30,000			30,000

                                                     Cash Account

Date	Particulars	Dr.	Date	Particulars	Cr.
				Purchase	10,000
	Balance	10,000
		10,000			10,000

                                                         Saleem Khan Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	20,000		Purchase	20,000
		20,000			20,000

Trial Balance

The trial balance can be extracted from the closing balances of these accounts.

Accounts	Dr.	Cr.
Purchase	30,000
Saleem Khan		20,000
Cash		10,000
	30,000	30,000

2.   Purchase Day Book Purchase Accounting Method

Recording in Purchase day book and posting in General Ledger has been explained below.

a)    Purchase Day book is used to record credit purchases.

b)   Purchase Day book is used by large organization for high volume of Purchases.

c)    Purchase Journal total are entered in General Ledger.

d)   Purchase Journal form part of Double entry system.

e)    Subsidiary Ledger is maintained for individual customer as memorandum record.

Purchase Accounting Example

Credit Purchase made to following during week

Sara Khan = 20,000

Faheem Ahmed = 30,000

Jan Alam = 40,000

Recording in Purchase Day Book

Purchase Journal is special journal maintained by the large scale organization for credit sales.

                                                   Purchase Day Books

Sara Khan	20,000
Faheem Ahmed	30,000
Jan Alam	40,000
	90,000

Posting in General Ledger

The total figure of purchase journal is transferred to General ledger on periodical bases as shown below to total purchase account and total creditor accounts.

                                                   Total Purchase Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Profit & Loss	90,000	Total Creditor		90,000
		90,000			90,000

                                                  Total Creditor Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Total Purchase	90,000		Balance	90,000
		90,000			90,000

Memorandum Record

In addition to General ledger, the subsidiary ledger for individual account is maintained as memorandum record, and this record is updated regularly with each transaction. This ledger is memorandum record , but extremely important for creditor management i.e. tracking of individual balances and timely payments to creditor.

                                                  Sara Khan A/C

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	20,000		Purchases	20,000
		20,000			20,000

                                    

                                                   Faheem Ahmed Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	30,000		Purchases	30,000
		30,000			30,000

                                                      Jan Alam Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balalance	40,000		Purchases	40,000
		40,000			40,000