ACCOUNTING FOR PURCHASES

• 1.      Documents in the purchases cycle
  Businesses make purchases from suppliers. Purchases are similar in many respects to sales, except that the business is buying from a supplier rather than selling to a customer.
  The following documents might be used in a system designed to account for purchases.
  
  
  Purchase invoice: A request for payment from the supplier for goods delivered.
  
  
  
  
  2.      Recording purchases
  Purchases day book
  
  The purchases day book is one of the books of prime entry. It is used to make an initial record of purchases on credit. Purchase transactions on credit are entered in the purchases day book as a list.
  There may be several categories of item or service purchased each of which must be posted to an appropriate account.
  
  
  Double entry and updating the payables ledger
  Periodically (daily, weekly, monthly) a total for all transactions is posted to purchases and other expense accounts with the other side of the entry posted to the payables control account in the general ledger.
  In addition the individual amounts are used to update the suppliers’ individual balances in the payables ledger.
  The payables (purchase) ledger is also used to record purchase invoices from suppliers of other items, as well as purchases of goods. (For example the payables ledger is used to record details of invoices for rental costs, telephone expenses, and electricity and gas supplies and so on).
  Details of these expenses must be posted from the purchases ledger to the relevant accounts in the general ledger.
  To facilitate this, a day book might have analysis columns which show the different types of expense.
  Details of each individual invoice are also posted to the account of the individual supplier in the payables ledger.
  
  
  
  
  
  
  
  3.      Recording purchase returns
  Purchases returns day book
  The purchases returns day book is similar to the purchases day book, except that it records goods returned to suppliers.
  When goods are returned to a supplier, a credit note is received. The purchases returns day book records the credit note details.
  The total purchases returns are posted to the general ledger, by:
  ·         debiting the total trade payables account
  ·         crediting the purchases returns account, or possibly the purchases account.
  Returns to individual suppliers are also debited in the supplier’s individual account in the payables ledger.
  
  
  The payables ledger contains the accounts for each supplier of goods or services on credit. Each trade payables account shows how much the entity has bought on credit from a particular supplier, details of purchase returns, how much it has paid and what it currently owes to the supplier.
  
  
  
  
  
  4.      Discounts received
  Discounts received are settlement discounts that a business has been offered by its suppliers and which it takes up. The business pays earlier but pays less.
  
  
  Accounting for discounts received
  The invoice is recorded in payables at the full amount when it is received.
  Discount received can only be recognised when payment is earned within a given time frame so that a business becomes entitled to a discount.
  Discounts received from suppliers are recorded in a discounts received account.
  If a business decides to take up the offer of a settlement discount by paying the smaller amount sooner, the double entry for the payment is:
  
  
  
  The entry in the discount received account is a credit entry because it is effectively a reduction in an expense. In the statement of comprehensive income, it will be shown either as ‘other income’ or as a negative expense.
  Discounts received do not affect the total figure for purchases in the period, or the total cost of sales. In this respect they differ from purchase returns, which do reduce total purchase costs.
  ·         Discounts received are accounted for as an addition to profit in the period.
  ·         They are not accounted for as a deduction from purchase costs.
  
  
  Discounts received and the payables ledgers
  Discounts received are recorded in the individual supplier accounts in the payables ledger.
  
  
  
  
  5.      Payables control account
  The payables ledger control account is the name given to the account in the general ledger for total trade payables.
  Opening payables balance
  The opening balance in the payables ledger control account is a credit balance, because amounts payable are a liability.
  The payables ledger control account records all transactions involving credit purchases. Since business entities make most of their purchases on credit, the control account records virtually all purchases.
  ·         Credit entries in the payables control account are transactions that add to the total amount of payables.
  ·         Debit entries in the payables ledger control account are transactions that reduce the total amount of payables.
  
  
  
  The balance on the payables control account might be described as trade payables on the face of the statement of financial position.
  
  
  
  
  6.      Contra entries
  A business might sell goods or services to another business, and also buy goods or services from that same business.
  The other business is both a customer and a supplier, and might therefore be a receivable and a trade payable at the same time. When this happens, the two businesses might agree to offset the amounts that they owe each other, leaving a net amount payable by the business with the higher debt.
  A contra entry is a double entry that offsets one amount against another.
  Contra entries must be made in the general ledger and also the receivables and payables ledgers.
  
  
  
  
  
  7.      Terminology
  Purchases day book: Purchases journal
  Payables ledger: Creditors ledger, Purchases ledger
  Payables control account: Payables ledger control account, Purchases ledger control account, Total purchases control account, Creditor control account, Account payable control account, Bought ledger adjustment account.