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