Journal Entry for Cash Purchase

Cash purchase is the process of purchasing material, fixed assets, and other services by using cash payment immediately. Instead of delaying payment, the company settles the payment after receiving goods or services.

Purchase on credit If you buy something, but don’t pay for it right away. The company will settle balance based on the credit term that the supplier provides. Credit purchase helps the company to acquire the necessary items without paying huge cash. The company can arrange the credit term with the supplier to delay the payment within a certain period of time. Without the credit purchase, the company will not be able to get the necessary items such as inventory, fixed assets, and so on.

Not all suppliers will provide credit purchases to the customers. Some companies require the customer to pay the cash right after receiving goods or services. It depends on the nature of the purchase that requires the customers to pay cash immediately. For example, it is not practical for the retail store to provide credit sales to the consumers.

Journal Entry for Cash Purchase

When the company purchases the item using cash, they need to record cash decrease and debit assets or expenses which depend on the nature of the purchase.

If the company purchases raw material, they need to record inventory and cash paid. It includes the finished product which retailer purchases for reselling.

The journal entry is debiting inventory and credit cash.

The purchase of fixed assets will increase fixed assets balance and reduce the cash balance.

The journal entry is debiting fixed assets and credit cash on hand or cash at bank.

Journal Entry for Cash Purchase Example

ABC is a cloth manufacture that purchases raw material from overseas and produces the cloth for the local market. During the month company makes the following purchase:

• Purchase raw material $ 50,000
• Purchase new building $ 100,000
• Purchase postal card $ 100.

All these purchases are settled immediately by cash.

Please prepare a journal entry for the purchase.

The purchase of raw materials will impact the inventory balance and cash balance. The journal entry is debiting inventory $ 50,000 and credit cash $ 50,000.

Raw material will increase by $ 50,000 on the balance sheet while cash decrease for the same amount.

When the company new building, they have to increase fixed assets balance and reduce cash.

The journal entry is debiting fixed assets $ 100,000 and credit cash $ 100,000.

The cash payment of $ 100,000 will be credited from the balance sheet. In exchange, we need to increase fixed assets on balance sheet.