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 are happened when entity make a purchase of goods or renders the services and then make the payments by cash immediately.

Most of the business prefer to make the payments by banks transactions so that the fraud case might be minimize. And sometime, entity’s management want to manage its cash flow by keeping delay to pay later or obtain long credit term.

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

If the purchase are 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 reduces since the entity make the payments to suppliers and reduce of cash should be recording in credit.

Others entry is expenses or asset. It is depending on what items that entity purchase. For example, if the purchase item is office supplies, expenses is the account that should be recorded into.

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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 is happened when entity make the purchase on goods or services and then make the payments later. In this case, entity also need to records the transaction even thought the payments are not make the the supplier yet.

For the credit purchase, there is no transactions related to the cash yet at the time of purchase. Yet, the transactions will affect at the time of pay payments.

The account that affect the credit purchase at the time purchasing are 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 importance account that affect at the time of purchasing are account payable (maybe the suppliers account) and office supplies expenses, assets items or expenses.

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

In this case, entity need to recognize both expenses and account payable at the same times.

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

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

And account payable will be reduced when entity make payments to suppliers. It is depending what types of payments channel that entity want to pay. By cash or bank transactions.

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If the payments is by 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