Recording Purchase Transactions (Cambridge International IGCSE Accounting)

Cash purchases

What is a cash purchase?

• A cash purchase is when the business pays the supplier upfront for goods or services

• The supplier issues the business with a receipt

  • The receipt is used as the business document

• The book of prime entry is the cash book

How do I record a cash purchase in the ledger accounts?

• Credit the cash or bank account in the nominal ledger

  • This is because the business is spending cash
  • The asset is decreasing

• Debit the purchases account in the nominal ledger

  • This is because the profit is decreasing
  • The capital is decreasing

Exam Hint Note that no entries are made in the trade payables accounts. This is because the goods were paid for straight away. Therefore, the business does not owe the supplier any money.

Worked Example A business buys $50 worth of goods from Halina on 5 January 2024. The business pays in cash upfront. Record this transaction in the ledger accounts for the business.

Answer:

Purchases Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Jan 5	Final answer: Cash	Final answer: 50

Cash Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 5	Final answer: Purchases	Final answer: 50

Credit purchases

What is a credit purchase?

• A credit purchase is when a business pays a supplier later for goods or services

• The business will receive an invoice from the supplier

  • The invoice is used as the business document

• The book of prime entry is the purchases journal

How do I record a credit purchase in the ledger accounts?

• Credit the trade payable's account in the purchases ledger

  • This is because the business owes money to the credit supplier
  • The liability is increasing

• Debit the purchases account in the nominal ledger

  • This is because the profit is decreasing
  • The capital is decreasing

Exam Hint Note that no entries are made in the cash or bank accounts as no cash has been exchanged yet.

Worked Example A business buys $300 worth of goods from Halina on credit on 10 January 2024. Record this transaction in the ledger accounts for the business.

Answer:

Purchases Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Jan 10	Final answer: Halina	Final answer: 300

Halina Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 10	Final answer: Purchases	Final answer: 300

Payments to credit suppliers

How could a business pay an invoice to a credit supplier?

• A business could pay by:

  • Cash payment
  • Cheque
  • Bank transfer
  • Telephone transfer

• Cheques and transfers are recorded in the bank account

• Bank statements, cheque counterfoils, and receipts are used to record these payments

• The book of prime entry is the cash book

How do I record a payment to a credit supplier in the ledger accounts?

• Credit the cash or bank account in the nominal ledger

  • This is because the business is spending money
  • The asset is decreasing

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes the supplier less money
  • The liability is decreasing

Worked Example A business pays Halina $100 toward an invoice by bank transfer on 11 January 2024. Record this transaction in the ledger accounts for the business.

Answer:

Halina Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Jan 10	Final answer: Bank	Final answer: 100

Bank Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 10	Final answer: Halina	Final answer: 100

Discount received

What is discount received?

• A business might be offered a cash discount by a credit supplier for early repayment of an invoice

  • This is not a trade discount

• The business is receiving a discount from a credit supplier

• The book of prime entry is the cash book

Exam Hint You do not need to know the business document for a cash discount received.

How do I record discount received in the ledger accounts?

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes less money to a credit supplier
  • The liability is decreasing

• Credit the discount received account in the nominal ledger

  • This is because the profit is increasing
  • The capital is increasing

• You will normally have to record the transaction for a payment at the same time

  • Make sure that the sum of the debit entries equals the sum of the credit entries

Exam Hint Questions will normally:

• Tell you the percentage for the discount allowed
• Tell you that a customer paid an amount in full settlement of their debt

Worked Example A business issues a cheque for $175 to Halina on 12 January 2024 in full settlement of a debt of $200. Record this transaction in the ledger accounts for the business.

Answer:

Halina Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Jan 11	Final answer: Discount received	Final answer: 25
Final answer: Jan 11	Final answer: Bank	Final answer: 175

Discount Received Account

Date	Details	$	Date	Details	$
			Final answer: 2024 Final answer: Jan 11	Final answer: Halina	Final answer: 25

Bank Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 11	Final answer: Halina	Final answer: 175

Dishonoured cheques issued to credit suppliers

What is a dishonoured cheque?

• A dishonoured cheque is a cheque that has been returned by the bank

  • This could be because the business did not have the funds to cover the transaction
  • Or it could be due to an error on the cheque such as a missing signature

• This means that the money stated on the cheque has not been paid to the supplier by the business

How do I record a dishonoured cheque in the ledger accounts?

• A dishonoured cheque is recorded by making the same entries as when the cheque was received but on the opposite sides of the accounts

• Debit the bank account in the nominal ledger

  • This is because the bank account would have been credited when the cheque was issued
  • Debit the amount that is stated on the cheque

• Debit the discount allowed account in the nominal ledger

  • If a cash discount was received from the credit supplier then this also needs to be balanced
  • The discount received account would have been credited when the cheque was issued

• Credit the trade payable's account in the purchases ledger

  • This is because the trade payable's account would have been debited when the cheque was issued
  • The amount is added back onto the balance of the credit supplier
  • Credit the full amount of the transaction including any cash discount

Case Study Chris is a sole trader. Chris buys goods on credit from a supplier Daisy. Daisy allows Chris a 5% cash discount if he pays within a month.

On 1 May, Chris buys goods on credit costing $200 from Daisy. Chris records this by crediting Daisy's account and debiting the purchases account.

On 7 May, Chris benefits from the cash discount and sends Daisy a cheque for $190. Chris records this by crediting $190 to the bank account and $10 to the discount received account. Chris balances this by making debit entries in Daisy's account totalling $200.

On 29 May, Chris is notified by Daisy that his cheque has been dishonoured. Chris records this by debiting $190 to the bank account and $10 to the discount received account. Chris balances this by making credit entries to Daisy's account totalling $200.

Here are how the entries appear in Chris's books.

Purchases account

Date	Details	$**	Date	Details	$
May 1	Daisy	200

Bank account

Date	Details	$	Date	Details	$
May 29	Daisy	190	May 7	Daisy	190

Discount received account

Date	Details	$	Date	Details	$
May 29	Daisy	10	May 7	Daisy	10

Daisy account

Date	Details	$	Date	Details	$
May 7	Bank	190	May 1	Purchases	200
May 7	Discount received	10	May 29	Bank	190
			May 29	Discount received	10

Purchases returns

What is a purchase return?

• A purchase return is when a business returns some goods to a supplier

• This could be because:

  • The goods were damaged
  • The goods were not what the business wanted

• The business will receive a credit note from the supplier

  • The credit note received is used as the business document

• The book of prime entry is the purchases returns journal

How do I record a purchase return in the ledger accounts?

• Debit the trade payable's account in the purchases ledger

  • This is because the business owes less money to a credit supplier
  • The liability is decreasing

• Credit the purchases returns account in the nominal ledger

  • This is because the profit is increasing
  • The capital is increasing

• If the business has already paid all of their invoices in full

  • Then the trade payable account will have a debit balance
  • This means the business is owed money from the supplier
  • This will be balanced when the business receives a cash refund

Worked Example A business returns goods to Halina on 12 January 2024 with a list price of $50. Record this transaction in the ledger accounts for the business.

Answer

Halina Account

Date	Details	$**	Date	Details	$
Final answer: 2024 Final answer: Jan 12	Final answer: Purchases Returns	Final answer: 50

Purchases Returns Account

Date	Details	$	Date	Details	**$
			Final answer: 2024 Final answer: Jan 12	Final answer: Halina	Final answer: 50

Refunds from credit suppliers

When is a refund received from a credit supplier?

• A refund may be received from a credit supplier

  • when there is a debit balance on the supplier account
  • if the business has overpaid for their goods
  • if the business has returned goods after paying for them

How do I record a refund in the ledger accounts?

• Debit the bank account in the nominal ledger

  • This is because the business is receiving money from the customer
  • The asset is increasing

• Credit the trade payable's account in the purchases ledger

  • This is to reduce how much the business is owed by the supplier
  • The liability is decreasing

Case Study Chris is a sole trader. Chris buys goods on credit from Maisy.

On 1 May, Chris buys goods on credit costing $200 from Maisy. Chris records this by crediting Maisy's account and debiting the purchases account.

On 4 May, Chris pays Maisy for the goods using a bank transfer. Chris records this by crediting the bank account and debiting Maisy's account.

On 11 May, Chris returns goods worth $50 to Maisy and requests a refund. Chris records this by crediting the purchases returns account and debiting Maisy's account.

On 13 May, Chris receives a refund of $50 from Maisy by a bank transfer. Chris records this by debiting the bank account and crediting Maisy's account.

Here are how the entries appear in Chris's books.

Purchases account

Date	Details	$**	Date	Details	$
May 1	Maisy	200

Bank account

Date	Details	$	Date	Details	$
May 13	Maisy	50	May 4	Maisy	200

Purchases returns account

Date	Details	$	Date	Details	$
			May 11	Maisy	50

Maisy account

Date	Details	$	Date	Details	$
May 4	Bank	200	May 1	Purchases	200
May 11	Purchases returns	50	May 13	Bank	50