Recording Purchase Transactions (Edexcel IGCSE Accounting)

A cash purchase is when the business pays the supplier upfront for goods or services

The supplier issues the business with a receipt

• The receipt is used as the source document

The book of original entry is the cash book

Credit the cash or bank account in the nominal ledger

• This is because the business is spending cash

• The asset is decreasing

Debit the purchases account in the nominal ledger

Note that no entries are made in the trade payables accounts

• This is because the goods were paid for straight away

• Therefore the business does not owe the supplier any money

A credit purchase is when a business pays a supplier later for goods or services

The business will receive an invoice from the supplier

• The invoice is used as the source document

The book of original entry is the purchases day book

Credit the trade payable account in the payables ledger

• This is because the business owes money to the credit supplier

• The liability is increasing

Debit the purchases account in the nominal ledger

Note that no entries are made in the cash or bank accounts

• No cash has been exchanged yet

A business could pay by:

• Cash payment

• Cheque

• Bank transfer

• Telephone transfer

Cheques and transfers are recorded in the bank account

Bank statements, cheque counterfoils, remittance advice and receipts are used to record these payments

The book of original entry is the cash book

Credit the cash or bank account in the nominal ledger

• This is because the business is spending money

• The asset is decreasing

Debit the trade payable account in the payables ledger

• This is because the business owes the supplier less money

• The liability is decreasing

A business might be offered a cash discount by a credit supplier for early repayment of an invoice

• This is not a trade discount

The business is receiving a discount from a credit supplier

The discount received will be recorded on the purchase invoice

The purchase invoice is used as the source document

• The terms of the cash discount will be detailed

The book of original entry is the cash book

Debit the trade payable account in the payables ledger

• This is because the business owes less money to a credit supplier

• The liability is decreasing

Credit the discount received account in the nominal ledger

You will normally have to record the transaction for a payment at the same time

• Make sure that the sum of the debit entries equals the sum of the credit entries

A purchase return is when a business returns some goods to a supplier

• It is referred to as a return outwards

This could be because:

• The goods were damaged

• The goods were not what the business wanted

The business will receive a credit note from the supplier

• The credit note issued is used as the source document

The book of original entry is the purchases returns day book

Debit the trade payable account in the payables ledger

• This is because the business owes less money to a credit supplier

• The liability is decreasing

Credit the returns outwards (purchases returns) account in the nominal ledger

If the business has already paid all of their invoices in full

• Then the trade payable account will have a debit balance

• This means the business is owed money from the supplier

• This will be balanced when the business receives a cash refund