Double Entry for Purchase Transactions (Cambridge International AS Accounting)

Cash purchases

Spec point — preparation of ledger accounts

What is a cash purchase?

• A cash purchase is when the business pays the supplier upfront for goods or services

• The supplier issues the business with a receipt

  • The receipt is used as the business document

• The book of prime entry is the cash book

How do I record a cash purchase in the ledger accounts?

• Credit the cash or bank account in the nominal ledger

  • This is because the business is spending cash
  • The asset is decreasing

• Debit the purchases account in the nominal ledger

  • This is because the profit is decreasing
  • The capital is decreasing

Exam Hint Note that no entries are made in the trade payables accounts. This is because the goods were paid for straight away. Therefore, the business does not owe the supplier any money.

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	$
Final answer: 2024 Final answer: Jan 5	Final answer: Cash	Final answer: 50

Cash Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 5	Final answer: Purchases	Final answer: 50

Credit purchases

Spec point — preparation of ledger accounts

What is a credit purchase?

• A credit purchase is when a business pays a supplier later for goods or services

• The business will receive an invoice from the supplier

  • The invoice is used as the business document

• The book of prime entry is the purchases journal

How do I record a credit purchase in the ledger accounts?

• Credit the trade payable's account in the purchases ledger

  • This is because the business owes money to the credit supplier
  • The liability is increasing

• Debit the purchases account in the nominal ledger

  • This is because the profit is decreasing
  • The capital is decreasing

Exam Hint Note that no entries are made in the cash or bank accounts as no cash has been exchanged yet.

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	$
Final answer: 2024 Final answer: Jan 10	Final answer: Halina	Final answer: 300

Halina Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 10	Final answer: Purchases	Final answer: 300

Payments to credit suppliers

Spec point — preparation of ledger accounts

How could a business pay an invoice to a credit supplier?

• A business could pay by:

  • Cash payment
  • Cheque
  • Bank transfer
  • Telephone transfer

• Cheques and transfers are recorded in the bank account

• Bank statements, cheque counterfoils, and receipts are used to record these payments

• The book of prime entry is the cash book

How do I record a payment to a credit supplier in the ledger accounts?

• Credit the cash or bank account in the nominal ledger

  • This is because the business is spending money
  • The asset is decreasing

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes the supplier less money
  • 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	$
Final answer: 2024 Final answer: Jan 10	Final answer: Bank	Final answer: 100

Bank Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 10	Final answer: Halina	Final answer: 100

Discount received

Spec point — preparation of ledger accounts

What is discount received?

• A business might be offered a cash discount by a credit supplier for early repayment of an invoice

  • This is not a trade discount

• The business is receiving a discount from a credit supplier

• The book of prime entry is the cash book

How do I record discount received in the ledger accounts?

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes less money to a credit supplier
  • The liability is decreasing

• Credit the discount received account in the nominal ledger

  • This is because the profit is increasing
  • The capital is increasing

• You will normally have to record the transaction for a payment at the same time

  • Make sure that the sum of the debit entries equals the sum of the credit entries

Exam Hint Questions will normally:

• Tell you the percentage for the discount allowed
• 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	$
Final answer: 2024 Final answer: Jan 11	Final answer: Discount received	Final answer: 25
Final answer: Jan 11	Final answer: Bank	Final answer: 175

Discount Received Account

Date	Details	$	Date	Details	$
			Final answer: 2024 Final answer: Jan 11	Final answer: Halina	Final answer: 25

Bank Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 11	Final answer: Halina	Final answer: 175

Purchases returns

Spec point — preparation of ledger accounts

What is a purchase return?

• A purchase return is when a business returns some goods to a supplier

• This could be because:

  • The goods were damaged
  • The goods were not what the business wanted

• The business will receive a credit note from the supplier

  • The credit note received is used as the business document

• The book of prime entry is the purchases returns journal

How do I record a purchase return in the ledger accounts?

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes less money to a credit supplier
  • The liability is decreasing

• Credit the purchases returns account in the nominal ledger

  • This is because the profit is increasing
  • The capital is increasing

• If the business has already paid all of their invoices in full

  • Then the trade payable account will have a debit balance
  • This means the business is owed money from the supplier
  • This will be balanced when the business receives a cash refund

Worked Example A business returns goods to Halina on 12 January 2024 with a list price of $50. Record this transaction in the ledger accounts for the business.

Answer

Halina Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Jan 12	Final answer: Purchases Returns	Final answer: 50

Purchases Returns Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 12	Final answer: Halina	Final answer: 50