Businesses purchase the stock of goods for the reselling purpose. For instance, a bookshop purchases the stock of stationery for selling it to the customers. A business purchases goods either on a cash basis or a credit basis. When a business purchases goods on a cash basis, the business exchanges cash for the goods. On the other hand, when a business purchases goods on a credit basis, the business receives goods from the supplier but the business does not pay cash at the same time.
Businesses use a separate prime entry book to record the purchases of goods on a credit basis. This prime entry book is called the purchases journal or purchases day book. Therefore, businesses record credit purchases primely in the purchases journal before recording in the ledger accounts. The purchases journal is only a prime entry book and it does not perform the dual function. Thus, the purchases journal is the prime entry book in which credit purchase of trade goods are recorded.
Source document of purchases journal
Trade creditors are the parties who provide goods on credit basis. The business owes to the creditors. Thus, creditors are liabilities
of a business. When selling goods on credit, the suppliers (creditors) prepare a source document including the details of the transaction such as date of sale, description of goods, value, etc. We call this source document as the invoice
. So, the invoice is prepared by the credit supplier (the creditor) and given to the buyer. Generally, the supplier (seller) keeps a copy of the invoice prepared and gives the original to the buyer. The invoice becomes a sales invoice for the business which sells goods on credit. On the other hand, the invoice becomes the purchase invoice for the business which purchases goods on credit. Therefore, the source document of the purchases journal is the purchase invoice
The business which purchased goods on credit records the credit purchase in the purchases journal by using the information on the purchase invoice.
Example of an invoice
According to the above invoice, the business, KC Stationery is the supplier (seller) and has prepared the invoice. KC Stationery has sold goods (stationery) on credit to Sapumal Bookshop. Therefore, Sapumal Bookshop is the buyer. This invoice is a sales invoice to KC Stationery and a purchase invoice to Sapumal Bookshop.
The listed price of goods is Rs. 38 500. A 10% trade discount is a deduction from the listed price which is Rs. 3850. For the purchaser (Sapumal Bookshop) the credit purchase amount is Rs. 34 650 (Rs. 38 500 - 3 850). Therefore, Sapumal Bookshop owes Rs. 34 650 to KC Stationery. Sapumal Bookshop has to record the net purchase (Rs. 34 650) value after deducting the trade discount in the purchases journal.
‘5/30 net 60’ is a condition given for the buyer. Number 5 indicates 5% which is the cash discount amount. Number 60 indicates 60 days which is the total credit period available for the buyer. 30 indicates 30 days and if the buyer settles his credit amount within 30days he can obtain the cash discount of 5%. Therefore, the meaning of this condition is the buyer should settle the credit amount within 60 days and if he/she settles within 30 days, a 5% cash discount will be given.
Format of Purchases Journal
Recording in the purchases journal and posting into the ledger
As illustrated in the above, the purchases journal has five columns. These columns are date, invoice number, supplier, total value, and ledger page. After deducting the trade discount, the net purchase value of an invoice is recorded in the 'total value" column of the purchases journal.
Likewise, a business records all the credit purchases relevant to a particular month. At the end of the month, the total credit purchases of the purchase journal is debited into the purchases account. Thereafter, each credit purchase value will be credited separately into the respective creditor's account.