Basic Accounting Question

suttonboi1

Hi all,

Basic accounting question here.

If I purchased goods as a business would the double entry for the transaction be:

Dr Inventory 100
Cr Bank/Trade Payables 100

or

Dr Purchases 100
Cr Bank/Trade Payables 100

I seem to come across this a bit in my studies and purchases/inventory appear to be used interchangeably. Surly if I debit inventory on purchase then there wont be a record of purchases but if I debit purchases then my inventory will be off.

Thanks in advance.

smcgiff

In reality there would be no account for "purchases" - this might be a term used for students starting out maybe.

Your debit will be to inventory or a named expense such as electricity (or possibly a fixed asset etc).

It will be inventory/stock if it is something purchased for resale and therefore a current asset.

If it is an expense that is fully used up then it will be debited to a P&l account.

shuyin1

See picture

suttonboi1

shuyin1 wrote: »

See picture

In essence what you are doing there is debiting and crediting Cost of Sales. i.e. Purchases is a part of cost of sales, right?

suttonboi1

Assume no opening stock.

Purchased €1,000 worth of goods for resale.

During the year sold €750 of these for €2,000.

Double Entry:

Dr Inventory €1,000
Cr Bank €1,000
(Purchase of goods)

Dr Bank €2,000
Cr Revenue €2,000
(Sale of goods)

Dr COS??? €750
Cr Inventory €750
(Recognition of reduction in inventory)

Because COS is made up of Op stock, purchases and closing stock I am confused as to how this all fits into the P&L. I know profit should be €1,250 but not sure how this works as closing stock is €250 (1,000-750) See below:

P&L Extract
Revenue €2,000
Op Stock 0
Purchases ?
Cl Stock (€250)

Thanks for the help guys and girls!

smcgiff

Ah, I see why your using the term purchases now.

You've already given the answer. It's 750.

You may understand this better if you were familiar with the use of the extended Trial Balance where opening and closing stock are entered.

Flem31

suttonboi1 wrote: »

Hi all,

Basic accounting question here.

If I purchased goods as a business would the double entry for the transaction be:

Dr Inventory 100
Cr Bank/Trade Payables 100

or

Dr Purchases 100
Cr Bank/Trade Payables 100

I seem to come across this a bit in my studies and purchases/inventory appear to be used interchangeably. Surly if I debit inventory on purchase then there wont be a record of purchases but if I debit purchases then my inventory will be off.

Thanks in advance.

Hi,
Normally the entry would be to debit Purchases and credit Bank\Trade Creditors as it would reflect the cost of the goods which will be matched off by a subsequent sale at a later point.

It would also be assumed that you purchased the goods so that they will be sold in a fairly prompt fashion......however if they are not, they will be captured via the closing stocktake which will reflect that you still have the stock.
The closing stock entry would be
Debit Closing Stock in the Balance Sheet (reflects the asset)
Credit Closing Stock in the P&L (to reduce the cost of sales)



Some large businesses put the purchases thru stock account or a work in progress account and release it back into purchases when the sale takes place but it just adds a lot more complexity and can easily get out of control.

shuyin1

suttonboi1 wrote: »

Assume no opening stock.

Purchased €1,000 worth of goods for resale.

During the year sold €750 of these for €2,000.

Double Entry:

Dr Inventory €1,000
Cr Bank €1,000
(Purchase of goods)

Dr Bank €2,000
Cr Revenue €2,000
(Sale of goods)

Dr COS??? €750
Cr Inventory €750
(Recognition of reduction in inventory)

Because COS is made up of Op stock, purchases and closing stock I am confused as to how this all fits into the P&L. I know profit should be €1,250 but not sure how this works as closing stock is €250 (1,000-750) See below:

P&L Extract
Revenue €2,000
Op Stock 0
Purchases ?
Cl Stock (€250)

Thanks for the help guys and girls!

Take the journals I posted and add on a zero. To reflect the sale of 750 you'd dr cos 750 cr inv 750 (balance sheet inv 250). Your profit&loss will be sale 2000-750 cos=1250 profit. (COS of 750=obal inv 0 + pur 1000 - 250 cbal inv).

suttonboi1

shuyin1 wrote: »

Take the journals I posted and add on a zero. To reflect the sale of 750 you'd dr cos 750 cr inv 750 (balance sheet inv 250). Your profit&loss will be sale 2000-750 cos=1250 profit. (COS of 750=obal inv 0 + pur 1000 - 250 cbal inv).

By doing that you have a debit balance of 250 on inventory, Purchases are 1000, and you have a credit balance on your COS of 250 also. Can you please explain this to me?

i.e. your entries (lets ignore creditors acc and put everything through bank)

Dr Purchases 1,000
Cr Bank 1,000

Dr Inventory 1,000
Cr COS 1,000

Dr Bank 2,000
Cr Revenue 2,000

Dr COS 750
Cr Inventory 750

smcgiff

Using all the terms purchases, inventory and cost of sales is a bit confusing.

Most companies have a cost of sales account where all purchases for resale are posted and at the year end a stock take is done to:-

Dr Balance Sheet €250
Cr P&L €250
Being posting of closing stock (or closing inventory if you prefer)

shuyin1

suttonboi1 wrote: »

By doing that you have a debit balance of 250 on inventory, Purchases are 1000, and you have a credit balance on your COS of 250 also. Can you please explain this to me?

i.e. your entries (lets ignore creditors acc and put everything through bank)

Dr Purchases (COS)1,000
Cr Bank 1,000

Dr Inventory 1,000
Cr Closing inventory P&L (COS) 1,000

Net effect:
dr inv 1000
cr bank 1000
You can skip the cancelling journal but that's the full flow of the transaction.

Dr Bank 2,000
Cr Revenue 2,000

Dr COS 750
Cr Inventory 750

You're left with:
BS DR INV 250
PL DR COS 750
BS CR BANK 1000
BS DR BANK 2000
PL CR REVENUE 2000

P&L
Rev 2000
Cos (750)
Np 1250

BS
Current Assets
Inv 250
Bank 1000

Equity
Profit for the year (1250)