Schooner inc. purchased equipment by signing a note payable. this transaction would be recorded as:

What is the Purchase Credit Journal Entry?

A purchase credit journal entry is recorded by a business in their purchases journal on the date a business purchases goods or services on credit from a third party.

The business will debit the purchases account and credit the accounts payable account in the business’s Purchases journal.

Recording the Journal Entry for a Credit Purchase

When a business purchases goods or services on credit, the business will then debit the purchases account, which will increase the business’s assets.

The business will also credit the accounts payable account, which will increase the business’s liabilities.

This transaction would lead to the following journal entry.

When the business pays the vendor for the purchase, the accounts payable account will be debited, and the cash account will be credited.

The journal entry for this transaction is as follows.

Example of Purchase Credit Journal Entry

Suppose there is a company that manufacturers and sells electric bicycles.

This company purchases some tires on November 10th, 2021, from a vendor on credit for $5,000.

The company supplying the tires expects to be paid within 30 days of the purchase.

The electric bicycle company will need to record this transaction.

Entry

When the electric bicycle company purchased bicycle tires from a vendor on November 10th, 2021, the company debited the purchases account for $5,000 and credited the accounts payable account for $5,000.

The electric bicycle company paid $5,000 to the tire company on November 30th, 2021.

At this point, the electric bicycle company debited the accounts payable account for $5,000 and credited the cash account for $5,000.

The journal entries for the purchase and payment of the tires are as follows.

Purchase

Payment

Advantages and Limitations

Purchase Credit Journal Entry Advantages

• When goods are purchased on credit, recording the transaction of the goods or services helps the business to keep track of their credit purchases.
• Keeping track of these purchases allows a business to look up how much they owe on the purchase simply by looking up the transaction through the date and vendor involved.

Purchase Credit Journal Entry Limits

• People record purchase credit journal entries, and people make mistakes. Therefore, there is always the possibility that an error could occur. If an error does occur, the wrong transaction ends up in the purchases journal.
• For large companies with many transactions, the chance of an error occurring increases considerably

Conclusion

A business records a purchase credit journal entry in its purchases journal at the time it purchases goods on credit from its vendors.

When the business makes a purchase on credit, it debits the purchases account in its purchases journal, which will show up on the business’s income statement.

This amount will be credited to the accounts payable account because it is a credit purchase, and the business’s liabilities will increase with this purchase which will show up on the business’s balance sheet until the business finishes paying off the debt.

Key Takeaways

• If a business purchases goods on credit, the business will debit the purchase account, which will result in an increase in its inventory because the goods are purchased from a third party.
• When a business makes a purchase on credit, the accounts payable account is credited in the purchases journal. This results in the business’s liabilities increasing, which will show up in the business’s balance sheet until the debt is paid.

Article Sources & Citations

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1. Harper College "ACCOUNTING FOR TRANSACTIONS " Page 1 . February 15, 2022

2. University of Nebraska "Credit Advantages, Disadvantages and Common Types" Page 1 - 2. February 15, 2022

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