Journal Entry for Purchasing Goods

Inventory purchasedQ: What is the journal entry for the following?


Purchased goods from KJ Mehta for cash: 5,000 Rupees.
(Rupees = Indian currency)



A:
Goods or stock or inventory (all these words mean the same thing) are classified as assets in accounting. This is because they are items of monetary value for the business, the business will sell them to make a profit.

However, we do not always record goods that we purchase as assets. The way we record the purchase of goods and the journal entry for this will differ according to the type of inventory system we use.

1. Here is the journal entry for a perpetual inventory system:

Debit Inventory.....................5,000
Credit Cash/Bank...........................5,000


In this case we debit the Inventory account, which is an
asset account.

In a
perpetual inventory system we keep perpetual (meaning continuous, up-to-date) records of inventory. If a business has a computerized inventory system that updates the stock in real time as purchases and sales are made, this would be a perpetual system. Most businesses have some kind of perpetual inventory system, so this journal entry would be the most commonly used.

businessman computer perpetual inventory system



2. Here is the journal entry for purchasing goods when we have a periodic inventory system:

Debit Purchases.....................5,000
Credit Cash/Bank...........................5,000


In this journal entry we debit the Purchases account, which is an
expense .

In a
periodic inventory system , we only maintain periodic records of our inventory or stock (our records are not continually updated when we purchase goods or make sales). In this kind of system we don't have a real-time, up-to-the-minute computerized system that tracks how much inventory we have. Instead, we only have a rough idea of what inventory we have. We do physical inventory counts on a periodic basis (meaning every-now-and-then). Only at these points, after manually counting the goods, do we know exactly how many we have. And it's only at this point that we then update our inventory account in our accounting records (and also close off our temporary purchases account).

periodic inventory system physical inventory count

Because we don't keep continuous, up-to-date records in a periodic system, we debit the temporary purchases expense account instead of directly debiting the inventory (asset) account.

For the perpetual system, we directly debit the inventory account when making purchases, as we are continually tracking and updating the inventory we have.

Note that the inventory account is an
asset account, which is a permanent account , whereas the purchases is an expense account, which is a temporary account .

It's important for you to know the difference between the perpetual and periodic systems as you may be asked about this in any accounting question about goods you bought or sold. Check out our
full lesson on perpetual vs periodic inventory systems for a full explanation with more examples.

Hope that makes sense! Good luck!

Best,
Michael Celender
Founder of Accounting Basics for Students


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Comments for Journal Entry for Purchasing Goods

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Journal Entry
by: Anonymous

Mr. A purchase desktop from B and donate to C. What journal should be made in the books of A?

JOURNAL ENTRY
by: Anonymous

Purchase A/c Dr.
To Cash

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Journal Entry: Cash Purchase of Goods

by Austin Irikefe
(Lagos state, Nigeria)

Bought goods for cash $23000, how will i post it?

Comments for Journal Entry: Cash Purchase of Goods

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double taken up
by: Anonymous

what if when key in invoice & I want to journal this transaction cause of double taken up.
ct trade debtor
ct sales

CIRCULAR FLOW OF KNOWLEDGE
by: STHOBILE

Thank you! This program is of great help. Highly appreciated.

comment
by: Nelson

I enjoyed the lesson and trust that God will bless you even as people keep coming to learn from this website. Thank you so much, I appreciate it.

?
by: Anonymous

The cash goes down of : $23,000
Then the supplies (goods) goes up : +23,000

bought stock using cash
by: Anonymous

Debit inventories $23000
Credit bank $23000

Simple
by: Anonymous

Debit Inventory 23000 & Credit A/P 23000
Debit A/P 23000 & Credit Cash 23000

Cash Purchase of Goods
by: NiamatUllah

DR CR
Purchases 23000
Cash/Bank 23000
Payments against goods purchases

easy question
by: Anonymous

Dr Purchase
Cr Cash

good question
by: Anonymous

this is very good question

purchase goods
by: Anonymous

purchase a/c Dr.
to cash
(bring cash purchase of goods)

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