Journal Entry for Purchasing Goods
Q: What is the journal entry for the following?
Purchased goods from KJ Mehta for cash: 5,000 Rupees.
(Rupees = Indian currency)
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 don't 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
1. Perpetual Inventory SystemHere is the journal entry for a perpetual inventory system:Debit Inventory.....................5,000
In this case we debit the Inventory account, which is an asset
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. Periodic Inventory SystemHere is the journal entry for purchasing goods when we have a periodic inventory system:Debit Purchases.....................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).
Because we don't keep continuous, up-to-date records in a periodic system, during the year we debit the temporary purchases expense
account instead of directly debiting the inventory
For the perpetual system, we directly debit the inventory
account when making purchases during the year, 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.
See further below for another question on the journal entry for purchasing goods.
Hope this explanation makes sense! Good luck!
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