Exam code:0452 & 0985
Cash purchases
What is a cash purchase?
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A cash purchase is when the business pays the supplier upfront for goods or services
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The supplier issues the business with a receipt
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The receipt is used as the business document
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The book of prime entry is the cash book
How do I record a cash purchase in the ledger accounts?
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Credit the cash or bank account in the nominal ledger
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This is because the business is spending cash
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The asset is decreasing
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Debit the purchases account in the nominal ledger
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Note that no entries are made in the trade payables accounts
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This is because the goods were paid for straight away
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Therefore the business does not owe the supplier any money
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Worked Example
A business buys $50 worth of goods from Halina on 5 January 2024. The business pays in cash upfront. Record this transaction in the ledger accounts for the business.
Answer
Purchases Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 5 |
Cash |
50 |
Cash Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 5 |
Purchases |
50 |
Credit purchases
What is a credit purchase?
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A credit purchase is when a business pays a supplier later for goods or services
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The business will receive an invoice from the supplier
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The invoice is used as the business document
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The book of prime entry is the purchases journal
How do I record a credit purchase in the ledger accounts?
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Credit the trade payable account in the purchases ledger
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This is because the business owes money to the credit supplier
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The liability is increasing
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Debit the purchases account in the nominal ledger
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Note that no entries are made in the cash or bank accounts
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No cash has been exchanged yet
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Worked Example
A business buys $300 worth of goods from Halina on credit on 10 January 2024. Record this transaction in the ledger accounts for the business.
Answer
Purchases Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 10 |
Halina |
300 |
Halina Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 10 |
Purchases |
300 |
Payments to credit suppliers
How could a business pay an invoice to a credit supplier?
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A business could pay by:
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Cash payment
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Cheque
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Bank transfer
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Telephone transfer
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Cheques and transfers are recorded in the bank account
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Bank statements, cheque counterfoils, and receipts are used to record these payments
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The book of prime entry is the cash book
How do I record a payment to a credit supplier in the ledger accounts?
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Credit the cash or bank account in the nominal ledger
-
This is because the business is spending money
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The asset is decreasing
-
-
Debit the trade payable account in the purchases ledger
-
This is because the business owes the supplier less money
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The liability is decreasing
-
Worked Example
A business pays Halina $100 toward an invoice by bank transfer on 11 January 2024. Record this transaction in the ledger accounts for the business.
Answer
Halina Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 10 |
Bank |
100 |
Bank Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 10 |
Halina |
100 |
Discount received
What is discount received?
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A business might be offered a cash discount by a credit supplier for early repayment of an invoice
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This is not a trade discount
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The business is receiving a discount from a credit supplier
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The discount received will be recorded on the purchase invoice
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The purchase invoice is used as the business document
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The terms of the cash discount will be detailed
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The book of prime entry is the cash book
How do I record discount received in the ledger accounts?
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Debit the trade payable account in the purchases ledger
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This is because the business owes less money to a credit supplier
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The liability is decreasing
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Credit the discount received account in the nominal ledger
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You will normally have to record the transaction for a payment at the same time
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Make sure that the sum of the debit entries equals the sum of the credit entries
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Examiner Tips and Tricks
Questions will normally:
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Tell you the percentage for the discount allowed
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Tell you that a customer paid an amount in full settlement of their debt
Worked Example
A business issues a cheque for $175 to Halina on 12 January 2024 in full settlement of a debt of $200. Record this transaction in the ledger accounts for the business.
Answer
Halina Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 11 |
Discount received |
25 |
|||
|
Jan 11 |
Bank |
175 |
Discount Received Account
|
Date |
Details |
$ |
Date |
Details |
$ |
|
2024 Jan 11 |
Halina |
25 |
Bank Account
|
Date |
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