Overview:

Entity purchases goods or renders services to run its business every day, and some of those purchasing transactions are on credit while others maybe pay by cash immediately—most of the purchases including raw materials, offices supplies as well as fixed assets.

All of these purchasing needs to records in the entity’s accounting system so that management could have the proper reports about its expenses and for management purposes.

The following are the accounting records for both purchases on credit and cash purchases.

Cash purchases:

Cash purchases have happened when an entity makes a purchase of goods or renders the services and then makes the payments by cash immediately.

Most of the business prefer to make the payments by banks transactions to minimize the fraud case. And sometimes, the entity’s management wants to manage its cash flow by keeping the delay in paying later or obtaining a long credit term.

For cash purchase, entities mostly use petty cash to make payments and for small items only. For larges purchases, they normally purchase on credit and make payments by banks transactions.

If the purchase is paid by cash, accounting transactions will be like this:

Debit Expenses or Assets based on products/material purchased ($ XXXX)

Credit Cash ($XXXX)

As you can see, cash will be reduced since the entity makes the payments to suppliers, and cash should be recorded in credit.

Others entry is expenses or assets. It depends on what items that entity purchases. For example, if the purchased item is office supplies, expenses are the account that should be recorded.

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However, if computers are the items that entity purchase, then fixed assets is the account that the entity should be recording into.

Credit Purchase:

Credit purchase has happened when an entity makes the purchase of goods or services and then makes the payments later. In this case, the entity also needs to records the transaction even though the payments are not made by the supplier yet.

There are no transactions related to the cash yet at the time of purchase for the credit purchase. Yet, the transactions will affect at the time of pay payments.

The accounts that affect the credit purchase at the time purchasing are an account payable and the corresponding accounts like expenses and assets.

The following is the example of credit purchase transactions:

Debit Expenses or Assets based on products/material purchased ($ XXXX)

Account Payable ($XXXX)

As you can see, the two important accounts that affect at the time of purchasing are account payable (maybe the supplier’s account) and office supplies expenses, assets items, or expenses.

Suppose the entity purchases office supplies for its operation. And it does not make payments at the time of purchasing.

In this case, an entity needs to recognize both expenses and accounts payable at the same time.

Both of these accounts are increasing at the time with the same amount. However, officer supplies are an increase in debt, and account payable is increased in credit.

Office supplies will directly affect the operating expenses in the income statement.

And account payable will be reduced when the entity makes payments to suppliers. It depends on what types of payments channel that entity wants to pay by cash or bank transactions.

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If the payments are by the bank, then the accounting transactions will be like:

Debit account payable = $XXX

Credit Banks = $XXX

If the payment is by cash, then the accounting transactions will be like:

Debit account payable = $XXX

Credit cash = $XXX