It is normal for sales (Also see Journal Entries for Sales Return) and purchases to happen on credit nowadays. However, having credit sales and purchases means that the time the business event takes place will be different from the timing the company receive (Also see Do You Know What is Accounts Receivable?) or spend cash. Thus, business owners should be cautious about the timing they record the transactions in their books of accounts. If they are not sure about how they should do so, employing an accounting firm in Johor Bahru will be a good choice because, with the help of the professionals, business owners can have peace of mind without having to worry whether they have recorded the transactions correctly or not.
When a company has made a purchase on credit, the accountants will pass the journal entries for credit purchases on the day the company bought the inventory, asset, goods or merchandise from another company on credit in the purchase journal. To record such transaction, he will debit the purchase account and credit the accounts payable account (Also see How to Differentiate Accounts Payable and Accrued Expenses?) in the company’s books of accounts.
A debit in the purchase account will cause the company’s asset to increase. At the same time, the accountant will record a credit in the accounts payable account since the amount of the purchase that the company has made becomes payable to the supplier in the future.
When the company settles the payment for the goods that it has purchased on credit to its supplier, the accountant (Also see How Can Accountants Help Small Business Owners?) will debit the accounts payable account. This is because by making the payment, the company settles its liability. At the same time, there will be a corresponding credit to the company’s cash account because the cash has flowed out from the company to pay the supplier.
For example, XYZ Corporation had purchased some merchandise from its supplier on credit. The value of those goods is RM30,000. Thus, the journal entries for this transaction are:
– Debit RM30,000 to the purchase account
– Credit RM30,000 to the accounts payable account
Then, in the next month, XYZ Corporation paid the amount for that purchase to its supplier. As soon as it has made the payment, the journal entries that the accountant will record are:
– Debit RM30,000 to the accounts payable account
– Credit RM30,000 to the cash account
Journal entries for credit purchases are very helpful in recording business transactions that involve credit purchases. This ensures that the company can keep track of all the credit purchases that it has made. Also, these journal entries enable business owners to check the outstanding balances they owe their suppliers whenever they want.