Double Entry Bookkeeping Lesson - Worked Example:

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Accounting for Purchases on Credit

This example covers: Purchasing on Trade Credit,
Purchase Invoices, Costs,
Trade Creditors, Payments

bookkeeping lesson purchases

1. UNDERSTAND: What are Purchases?

Purchases are things you buy - goods or services.  Typically the supplier gives your business credit and sends you an Invoice which you pay in cash at a later date.


2. UNDERSTAND: Basic Accounting

The cost needs reflecting in the Accounts from the date of the purchase, not the date of payment (ie. 'accruals accounting').

Posting the Purchase Invoice creates both a Cost and a Trade Creditor.

So the basic double entry is:


DEBIT (DR.)

CREDIT (CR.)

Cost a/c

(Profit / Income Statement)

Trade Creditor a/c

(Balance Sheet)


The cost reduces profit in the period.

The Trade Creditor is a liability, has a credit balance (you were given 'credit') and is shown on the Balance Sheet, awaiting payment.

Subsequent payment of the invoice reduces both Trade Creditors and Cash  - it has NO IMPACT on profit.


The worked example below shows the bookkeeping entries for raising a Purchase Invoice and its subsequent settlement.


3. Accounting for Purchases on Credit: Worked Example

Scenario:

During April Zelda: Zombie Slayer buys 100 kgs of Premium Zombie Repellant from regular supplier Zombies 'R' Us.

The cost is £2,300.  All 100kgs are used in April.

Her business - ZZS - receives an invoice in April for the full amount. Terms are 30 Days.

ZZS pay the invoice by BACs in full in May.


Requirements:

For ZZS:

1.  Show the double entry accounting entries for the purchase and subsequent settlement.

2. Show the Account Balances at end of April and May.

Ignore Taxes and Purchase Orders.


SOLUTION: Double Entry Accounting Entries and Balances

accounting-for-purchases-lesson

Keeping Accounting Simple Stupid!

One of our missions here at the Alternative Accountant is to provide simple, practical worked examples of double entry accounting across a range of real life Accounting Scenarios.

The reality of Accounting is that however sophisticated finance systems and ERP systems purport to be, the basic, simple principles of double entry accounting must - and will - always hold true.

What's more, these systems are only as good as the integrity of the processes and controls feeding them with data. As anyone who works in accounting knows, processes ALWAYS break down at some point!

A good grounding in double entry principles and mechanics is essential to understand and resolve the resulting issues and risks efficiently and correctly.


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