Definition Of Purchases: Accounting

Entries For Purchases

Purchases in accounting is the cost of buying

inventory or goods during a period with the
aim of resale in the ordinary course of the
business. Hence, Purchases is a kind of
expense and it is therefore included in the
income statement within the cost of goods
sold. In manufacturing concern, Purchases in
accounting may include cost of buying raw
materials. While for retail business, purchase
means buying of finished goods to resale.

However, it is very important to know that in

accounting, we have to differentiate between
the purchases that was explained above and
other purchases such as those involving the
procurement of a fixed assets (e.g. factory,
plant and machinery, motor van, land and
building, etc). The purchases involved in
procurement of fixed assets are capitalized in
the statement of financial position of the
business (i.e. they are recognized as assets of
the business) rather than being expensed in the
income statement. The income statement is
also called Trading, profit and loss account.

ACCOUNTING FOR PURCHASES

As purchase leads to an increase in the

expense of the business and decrease in assets
of the business. Therefore, expense must be
debited while assets must be credited. A
purchase also results in increase in inventory,
however the accounting for inventory is kept
separate from accounting for purchase.

In Business, purchase may be made on Cash

or on Credit.

CASH PURCHASE
Cash purchase occurs when a trader buys
goods and pay immediately. When a cash
purchase is made, the following double entry
is recorded:
1. Debit Purchases (Income Statement)
2. Credit cash
Purchase is debited to account for the increase
in expense. Cash is credited because there is a
decrease in cash (asset) after payment of the
goods.

CREDIT PURCHASE

Credit purchase occurs when there is an

exchange in goods between the buyer and the
seller but payment will be in future. In the
case of a credit purchase, the following double
entry is recorded:
1. Debit Purchases (Income Statement)
2. Credit Payable (Creditor)
When you purchase goods on credit, you will
have an increase in Creditor. Creditor means
the people you are owing.

The double entry is the same as in the case of

a cash purchase, except that the credit entry is
made in the payable ledger rather than the
cash ledger.

When the payable is paid his due, the payable

balance will be reduced to nil (depending on
whether he has old debts or not). The
following double entry is recorded:
1. Debit Payable (Reduction in liabilities)
2. Credit Cash (Reduction in assets)

Purchase Process
When you are into the business of goods or
services, the purchase process that you follow
may be
simple cash purchases, or even purchases on
credit. When you receive credit from your
parties, you
certainly implement measures to track the
credit and pay the dues on time. These may
include
credit limit from each supplier, and a
predefined period to clear the dues. You may
need to record
purchase returns, and receive cash or use debit
notes. Based on the type or volume of
business that
you run, you can use purchase order, receipt
note, and so on. You can manage all such
processes,
and more, using TallyPrime with the
flexibility of skipping any of the steps in-
between and
interchanging the sequence of entry.

Cash Purchases: Recording purchases for

instant payment is a single step process in
TallyPrime. In
the invoice, you can include details of all the
items purchased, or services received. These
purchase
details can be allocated to a single ledger or
multiple ledgers as needed. Additionally, you
can
include expenses like packaging,
transportation, insurance, and so on, and tax.
After recording the
details as per the invoice received from your
supplier, you can print it with the supplier’s
details, if
needed.
Credit Purchases & Payments: When you
purchase on credit, apart from the details
entered in the
cash purchase voucher, you can record the
invoice received from your supplier, record
payments to
the party against their invoices, and track the
payables to closure. You can enter the buying
prices
based on supplier profile.

Purchase Return & Debit Notes: When you

record purchase returns in your business
process, such
return transactions can be recorded in
TallyPrime, that too against the purchase
invoice, if needed.
Depending on the settlement of the bill, you
may treat it as a rejection out, or return cash or
use
debit note to settle the return. As per your
process, you can record the same in
TallyPrime. Such
debit notes, if any, can be consumed in
purchase invoice.

Receipt Note & Rejections-out: If your

business uses receipt note when shipping
items from your
supplier, you can use TallyPrime to create the
same. Later, you can record purchases against
the
receipt notes, and track the receipt notes to
closure. You also get the flexibility to
generate receipt
notes based on your purchase voucher. Item
returned, if any, based on receipt notes can be
recorded as rejections out, and settled.
Purchase Order: In case you follow purchase
order processing in your business, you can
create
purchase orders in TallyPrime. Against the
purchase order you may record receipt notes
or
purchase invoice. You can track such
purchase orders to closure by recording
receipt notes and
purchase invoices, and track receipt notes to
closure against purchase invoices. You may
even preclose
the orders.
􀀀
Though TallyPrime supports all these steps in
a purchase process, it is not necessary that you
choose to follow all these steps in any specific
order. For example, you can just use: purchase
or
purchase + payments or purchase order +
purchase + payments, and so on. You can
even record
purchase before purchase order, or purchase
before receipt note.

Reports: Various reports are available to track

purchases, payables, pending orders, pending
purchases, and so on. As in other reports,
these reports also have different views,
navigation
options, and support analysis based on
different parameters.

EXAMPLES OF PURCHASE
1. PURCHASE OF RAW MATERIALS
2. PURCHASE OF MACHINERY
3. PURCHASE OF GOODS

 PURCAHSE GOODS OF RS 4000 FROM

AKSHAY
 PURCHASE GOODS OF RS 25000
FROM BHUWAN
 PURCHASE GOODS OF RS 23000 IN
CASH
 PURCHASE GOODS FROM ALIBABA
OF RS 540900
 PURCHASE GOODS FROM SURESH
OF RS 234500
 PURCHASE GOODS FROM NIRAJ OF
RS 23433
 PURCHASE GOODS FROM ALIBABA
OF RS 45670
 PURCHASE GOODS FROM SURESH
OF RS 23890
 PURCHASE GOODS FROM NIRAJ OF
RS 233330

LET US DO A CASE STUDY TO

UNDERSTAND PURCHASE ENTERIES
1. NIPUN INDIA PVT LTD ,MOTI
NAGAR , NEW DELHI, STARTED A
BUSINESS ON 1ST APRIL 2021 WITH
A CAPITAL OF RS 1000000 IN CASH
INTRODUCED AND DEPOSITED RS
750000 IN SBI BANK (MOTI NAGAR
BRANCH ) ACCOUNT NO-
145144316541
2. NIPUN INDIA PVT LTD PURCHASE
GOODS WORTH RS. 24507 FROM
VIPUN INDIA PVT LTD ON 2 APRIL
2021 ON CREDIT
3. PURCHASE GOODS WORTH RS
76540 FROM GIRDHARI LAL AND
SONS ON 3RD APRIL 2021
4. PURCHASE GOODS WORTH RS
32470 FROM GORAKH LAL AND
SONS ON 3RD APRIL 2021
5. PURCHASE GOODS WORTH RS
24500 IN CASH FROM LOCAL
MARKET ON 3RD APRIL 2021
6. PURCHASE GOODS WORTH RS
37650 IN CASH FROM AN
UNREGISTERED DEALER ON 3RD
APRIL 2021
7. WITHDRAWL RS 2500000 CASH
FROM SBI BANK ON 1ST APRIL 2021
8. TRANSFER CASH RS 34250 TO
PETTY CASH BOOK ON 1ST APRIL
2021
9. TRANSFER RS 45000 FROM SBI
BANK TO NEW BANK ACCOUNT IN
ICICI BANK ON 2ND APRIL 2021
10. PAYMENT DONE TO VIPUN INDIA
LTD IN CASH ON 1ST MAY 2021
11. PAYMENT DONE TO GORAKH LAL
AND SONS FROM SBI BANK ON
IST MAY 2021
12. PAYMENT DONE TO GIRDHARI
LAL AND SONS RS 25000 ON 1ST
MAY 2021