Journal entry for purchased merchandise on account

Introduction

In business, we usually can purchase the merchandise on account from the suppliers that we have a close business relationship with. Likewise, we may need to make the journal entry for the merchandise purchased on account many times during the accounting period if there are many purchase transactions for the year.

The journal entry for merchandise purchased on account will increase our liabilities on the balance sheet since we do not use cash immediately for the purchase. On the other hand, we may need to record the merchandise inventory immediately or record a temporary purchases account on the debit side to account for the merchandise goods that we receive.

This is because there are two inventory systems including the periodic inventory system and the perpetual inventory system. So, if we use the perpetual inventory system, we will record the increase of the merchandise inventory immediately for the purchased merchandise.

However, if we use the periodic inventory system, we will record the purchased merchandise to the purchases account which is a temporary account instead. This is due to, under the periodic inventory system, we only update the balance of inventory periodically (e.g. usually at the end of the accounting period when we make the physical count of the inventory on hand).

Journal entry for purchased merchandise on account

We can make the journal entry for purchased merchandise on account by debiting the purchases account and crediting the accounts payable if we use the periodic inventory system.

Periodic inventory system:

The purchases account in this journal entry is a temporary account, in which it will be cleared at the end of the accounting period. This purchases account will be cleared when we calculate the cost of goods sold with the formula of beginning inventory plus purchases and minus ending inventory.

On the other hand, if we use the perpetual inventory system, we need to directly add the purchased amount of the merchandise goods to the merchandise inventory immediately. This is due to, under the perpetual inventory system, the inventory balance needs to be updated perpetually (e.g. every time there is an inventory in or inventory out).

In this case, we can make the journal entry for purchased merchandise on account under the perpetual inventory system with the debit of the merchandise inventory account and the credit of the accounts payable as below:

Perpetual inventory system:

In this journal entry, both total assets and total liabilities on the balance sheet will increase by the same amount as a result of the purchased merchandise goods on account.

Later, when we make the payment for the purchases that we have made on the account, we can make the journal entry to eliminate the accounts payable as below:

Purchased merchandise on account example

For example, on January 1, we make a $5,000 purchase of merchandise on account from one of our suppliers. Later, on February 1, we make the $5,000 cash payment for this credit purchase to our supplier to clear the debt on our balance sheet.

And we use the periodic inventory system in our company to manage all merchandise inventory transactions, such as merchandise inventory purchased in and merchandise inventory sold out.

In this case, we can make the journal entry for the $5,000 merchandise purchased on account on January 1, by debiting this amount to the purchases account and crediting the same amount to the accounts payable as below:

January 1:

We debit the $5,000 to the purchases account in this journal entry because we use the periodic inventory system. If we use the perpetual inventory system, the debit side will be for a different account.

Later, on February 1, we can make the journal entry for the payment of $5,000 for the merchandise purchased on account that we have made on January 1, as below:

February 1:

This journal entry will eliminate the $5,000 of accounts payable that we have recorded on January 1 for the purchase of merchandise inventory on account.

Example 2:

For another example, assuming that we use the perpetual inventory system instead of periodic inventory system. And we have made the same amount of $5,000 merchandise purchased on account as above on January 1.

In this case, the journal entry for the $5,000 merchandise purchased on account under the perpetual inventory system will be as below instead:

January 1:

This journal entry will increase both total assets and total liabilities by $5,000 as of January 1 as a result of the $5,000 merchandise purchased on account.

And later, when we make the $5,000 cash payment to eliminate the accounts payable that we have recorded on January 1, we can make the journal entry as below: