JOURNAL ENTRY FOR PURCHASE ( CASH,CREDIT AND OTHER PRACTICAL SCENARIOS INCLUDING INDIRECT TAXES)

accounting for purchase

Hi friends, here we are going to learn journal entry for Purchase.

Usually accounting software there is no need to pass journal entry like below
              
        
SL.NO
PARTICULAR
DEBIT
CREDIT
1
Purchase or Material  A/c      Dr
         To Sundry Creditor  A/c
XXXXX

XXXXX

Because in software there is separate entry field for Purchase, the required details will be updated in Purchase and Sundry Creditor ledgers.

Purchase are divided into cash Purchase and credit Purchase and further sub categorized into manufacturing Purchase and trading Purchase.

But i am giving brief explanation for the first entry here:-

Basic entry

Journal entry in case of cash Purchase of Rs.1000

SL.NO
PARTICULAR
DEBIT
CREDIT
1
ccPurchase A/c      Dr
         To Cash A/c
1000

1000
      
(Narration:- Being goods Purchased on cash against bill no:01)
*Dr=Debit
The rules for passing Journal Entry
Debit
Due to purchase goods are coming into business. Goods are treated as asset.
As per Real account rule (Purchase) “Debit what comes into business"
Credit
Here cash is going out of business because of purchase.
As per Real account rule(cash) "Credit what goes out of Business"(Current asset)

Journal entry in case Credit Purchase of Rs.1000

SL.NO
PARTICULAR
DEBIT
CREDIT
1
Purchase A/c      Dr
         To Creditor  A/c
1000

1000

(Narration:- Being goods Purchased on credit against bill no:02)
The rules for passing Journal entry
Debit
Due to purchase goods are coming into business. Goods are treated as asset.
As per Real account rule (Purchase) “Debit what comes into business"
Credit
Due to credit purchase we are liable to him. And he is giving us the goods on credit. The creditors balance will increase.
As per personal account rule(sundry Creditor) "Credit the giver account"(Current Liabilities)

Journal entry in case of MANUFACTURING/SERVICE companies with inclusive taxes(Taxes treated as asset)
Purchase of Raw material worth Rs. 1000/- including taxes of Rs.140/-


SL.NO
PARTICULAR
DEBIT
CREDIT
1
Purchase A/c            Dr
Duties & Taxes A/c   Dr(current asset)
         To Creditor A/c
860
140


1000
    
(Narration:- Being goods Purchased on credit against bill no:03)
The rules for passing Journal Entry
Debit
Due to purchase goods are coming into business. Goods are treated as asset.
As per Real account rule (Purchase) “Debit what comes into business"
Debit
As we are paying duties on purchase are eligible for Input credit and treated as asset.(I.e. the taxes paid to creditors are not expense and it has to be treated as asset and can be set off against the duties payable, But before treating it as asset the input eligibility should be checked. Normally the purchase related to manufacture Except Factory building items Ex-Cement& steel can be availed as Input credit)Ex: - EXCISE DUTY, VAT & SERVICE TAX.
As per Real account rule (Duties and taxes) "Debit what comes into business"(Current Assets)
Credit
Due to credit purchase we are liable to him. And he is giving us the goods on credit.The creditors balance will increase.
As per personal account rule(sundry Creditor) "Credit the giver account"(Current Liabilities)


Journal entry in case of MANUFACTURING/SERVICE companies with inclusive taxes (Taxes treated as Expense)
Purchase of Raw material worth Rs. 1000/- including taxes of Rs.140/-



SL.NO
PARTICULAR
DEBIT
CREDIT
1
Purchase A/c            Dr
Duties & Taxes A/c   Dr(Expenses)
         To Creditor A/c
860
140


1000
   
(Narration:- Being goods Purchased on credit against bill no:04)
The rules for passing Journal Entry
Debit
Due to purchase goods are coming into business. Goods are treated as asset.
As per Real account rule (Purchase) “Debit what comes into business"
Debit
As we paying duties which are not eligible for input credit will be treated as expense.(I.e. But before treating it as asset the input eligibility should be checked. Normally the purchase related to manufacture Except Factory building items Ex-Cement& steel can be availed as input credit )Ex: - EXCISE DUTY, VAT & SERVICE TAX.
As per Nominal account rule (Duties and taxes) "Debit all expense or loss"(expense)
Credit
Due to credit purchase we are liable to him. And he is giving us the goods on credit.The creditors balance will increase.
As per personal account rule(sundry Creditor) "Credit the giver account"(Current Liabilities)



Journal entry in case of Purchase with Normal Loss or Abnormal Loss

Purchase of Raw material worth Rs. 1000/- including taxes of Rs.90/- and abnormal loss of Rs.50/-



SL.NO
PARTICULAR
DEBIT
CREDIT
1
Purchase A/c            Dr
Duties & Taxes A/c   Dr(current asset)
Abnormal Loss A/c    Dr
         To Creditor A/c
860
50
90



1000

(Narration:- Being goods Purchased on credit vide bill no:01)
The rules for passing Journal Entry
Debit
Due to purchase goods are coming into business. Goods are treated as asset.
As per Real account rule (Purchase) “Debit what comes into business"
Debit
As we paying duties which are not eligible for input credit will be treated as expense.(I.e. But before treating it as asset the input eligibility should be checked. Normally the purchase related to manufacture Except Factory building items Ex-Cement& steel can be availed as input credit )Ex: - EXCISE DUTY, VAT & SERVICE TAX.
As per Nominal account rule (Duties and taxes) "Debit all expense or loss"(expense)
Debit
Abnormal losses will be treated as loss. So the abnormal loss will be shown on debit side of profit and loss account. 
As per Nominal account rule (Duties and taxes) "Debit all expense or loss"(expense)
(In case of Permissible damage it can be included in purchase A/c. The Taxes & Duties i.e. Excise duty & VAT paid is not entitle for input of quantity lost. When there is abnormal/not acceptable level of damage the same should transferred to abnormal loss account or the same can returned to party by raising the debit note. The Taxes & Duties i.e. Excise duty & VAT paid is not entitle for input of quantity lost or returned)
In simple words the Taxes & Duties i.e. Excise duty & VAT paid on purchase are eligible only for the quantity received.
Credit
Due to credit purchase we are liable to him. And he is selling us the goods on credit.The creditors balance will increase.
As per personal account rule(sundry Creditor) "Credit the giver account"(Current Liabilities)



Before passing entries you need to cross check the purchase entry with invoice in following areas:-
   1)Quantity 2) Rate per Kg 3) Excise Duty (Direct or Input as such) 4) VAT/CST.

    2) Date of purchase invoice

    
      In our next topic, i am going to explain  how to pass journal entry for Purchase return in different scenarios. 

Comments

Popular posts from this blog

AMALGAMATION :- JOURNAL ENTRIES IN THE BOOKS OF TRANSFEROR AND TRANSFEREE COMPANY

SOLVE AMALGAMATION PROBLEM IN 7 STEPS

PREPARE CONSOLIDATED BALANCE SHEET IN 9 STEPS