The purchases ledger

CREDIT SUPPLIERS’ personal accounts are recorded in the purchases ledger. At the end of the accounting period, the balances in the purchases ledger are listed in a schedule called the list of trade payables. This shows the individual’s closing account balance.

The following questions and their answers should help in understanding the entries to be made in the ledger.

WHAT ARE PURCHASES?

Purchases are regarded as goods bought by the business for the sole purpose of selling them to make a profit.

HOW ARE PURCHASES ENTERED?

Purchases are entered on the credit side of the supplier’s personal account.

WHAT ARE PERSONAL ACCOUNTS?

These are accounts for debtors and creditors.

WHAT ARE PURCHASES RETURNS?

Purchases returns, also known as returns outwards, are goods returned by the business to its suppliers.

HOW ARE PURCHASES RETURNS ENTERED?

Returns outwards are entered on the debit side of the supplier’s personal account.

ARE CASH PURCHASES RECORDED?

Cash purchases require two entries for the transactions:

Debit purchases account: to show increase of asset. Credit cash account: to record decrease of assets.

HOW ARE CREDIT PURCHASES RECORDED?

Credit purchases require only four entries for the whole transaction:

1. Two entries for purchases i.e.:

Debit purchases account

Credit supplier’s account

2. Two entries for the payment of money: Debit supplier’s account

Credit cash/bank account

WHAT IS A PURCHASES INVOICE?

This is a document the purchaser receives from the supplier giving details of the goods bought along with their prices.

WHAT IS THE DIFFERENCE BETWEEN THE PURCHASES AND SALES INVOICE?

An invoice is known to be a purchases invoice when it is entered in the books of the firm purchasing the goods. However, the same invoice in the books of the seller is a sales invoice.

SAMPLE OF AN INVOICE

Upon receiving the purchases invoice, the purchaser enters the details in his purchases journal for goods bought on credit, as below:

PURCHASES JOURNAL

Next step is to enter in the purchases ledger and general ledger:

PURCHASES LEDGER GENERAL LEDGER BRAIN TEASER

Choose the MOST suitable response to the questions below: 1. Purchases in accounting terms mean: a. Goods bought on credit only. b. Goods bought for resale to make a profit. c. Every item bought. d. Goods bought and paid for by cash only.

2. Sales should not include: a. Goods sold on credit. b. Items sold and are recorded in the purchases ledger. c. Goods sold for cash. d. Motor Vehicle sold.

3. What is the effect of the firm selling goods on credit? a. Increase creditors; increase cash. b. Decrease cash; decrease cash. c. Increase debtor; decrease stock of goods. d. Decrease creditors; decrease stock of goods.

4. Which of the following best describes sales? a. Goods sold on credit. b. Stock of goods sold for cash and on credit. c. Goods sold for cash. d. Assets sold.

5. Identify the correct from the following.

a. (iii) and (iv) ONLY b. (i)and (ii) ONLY c. (ii) ONLY d. (ii)and (iii) ONLY

6. Identify the incorrect from the following:

a. (ii) ONLY b. (ii)and (iii) ONLY c. (i)and (ii) ONLY d. (iii) and (iv) ONLY

Recommended answer to brain teaser:

This is all we have time for this week. Visit again next week when the presentation will continue. Remember: IF IT IS TO BE, IT IS UP TO ME (ten simple two-letter words.)