Purchase Goods on Credit Journal Entry

Purchasing goods on credit is the transaction that a company purchases the goods from a supplier and agrees to pay later.

It is a common practice for the business to purchase goods or services on credit. The company needs to use the goods immediately but make payment later.

Cash flow management is very important for most businesses. The company may be able to generate net income, but it may not able to generate enough cash flow to support the operation. It can lead to the liquidation of the company.

The credit term will vary depending on the supplier’s credit policy. The customer has the obligation to settle the payment within a certain time period. The late payment will lead to penalties such as interest charges. It also damages the relationship between customer and supplier. The seller may not provide a good credit term if the customer keeps delaying the payment. The seller also needs the cash to run the business too.

The company may purchase the goods such as inventory, fixed assets, and other services on credit. These are the main items that company requires to run the operation. The company to make the proper record of the

The buyer has to record goods receive when risk and reward are transferred from sellers. At the same time, they have to record the accounts payable which is the obligation to settle the balance.

Journal Entry for Purchase Goods on Credit

There are two accounts that need to record when purchasing the goods on credits. First, we need to record the goods receive which can be the inventory, fixed assets, or other assets depending on the nature of the items.

The company records assets by the time the risk and rewards are transferred. The company will responsible for the goods after this point, and they are able to use the goods for any purpose. The company will have the obligation to pay back to suppliers too, so they have to record the accounts payable.

The journal entry is debiting assets and credit accounts payable.

The asset type will depend on the type of item, it can be fixed assets or current assets. Accounts payable is the current liability as the credit term only lasts for a month or so.

Example

Company ABC purchases the goods cost $ 50,000 from the supplier. Due to the good relationship, the supplier agreed to provide a credit term of 2 months. These goods are the computer equipment that ABC plan for internal usage. Please prepare a journal entry for the purchase of goods on credit.

Company purchase the goods on credit, they have to record the goods and accounts payable as the items already received.

The goods are classified as fixed assets (Computers Equipment) on the balance sheet.

The journal entry is debiting Fixed Assets – Computer $ 50,000 and credit accounts payable $ 50,000.

The transaction will increase the fixed assets on the balance sheet $ 50,000. It also increases the accounts payable $ 50,000 which is the company obligation to settle with suppliers.

The company will reverse the accounts payable when making payments to the supplier. The journal entry is debiting accounts payable $ 50,000 and credit cash $ 50,000.