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“Purchases’ means the buying of goods for resale. These goods must be what the firm is trading in. They can also mean the purchase of materials, components or parts for the purpose of incorporating in products for resale. To a firm that deals in electrical goods, its purchases are made up of electrical goods. Something else that is bought such as a motor van cannot be included in purchases as the van is used for delivery of goods and not for resale.

Goods can be purchased with immediate payment of cash or on credit.

For cash purchases, the following accounts are affected:

  1. Debit the purchases account
  2. Credit the cash account

As cash is immediately paid for the purchases, the cash account is credited to show a decrease in the cash balance. The stock of goods is a debit balance and a debit entry in the purchases account is needed to add to the stock.

For purchases made on credit, entries are recorded in two sets of accounts, one of which is when purchase is made and the other when payment is made for the purchase.

  1. Debit purchases account
  2. Credit the supplier’s account

When the supplier is paid:

  1. Debit the supplier’s account
  2. Credit cash account

The purchases account is debited as the goods purchased is added to the debit side in the stock account. The supplier’s account is credited as payment has not been paid for the purchase, and to show to whom money is owed. When full payment is made to the supplier, the supplier’s account is debited to remove the outstanding balance. The cash account is credited as the asset of cash is decreased.

Last Updated (Saturday, 23 October 2010 10:39)