Buy Goods on Credit from a Supplier

If as a business you buy goods on credit from a supplier (accounts payable) then the supplier will supply the goods and business will incur a liability to the supplier for that amount, but no cash will change hands at that stage. Suppose for example, the business buys goods on credit for the amount of 4,000, then the journal entries will be as follows.

 

Buy Goods on Credit from a Supplier – Journal entries

The accounting records will show the following bookkeeping entries when you buy goods on credit from a supplier:

Buy Goods on Credit Journal Entry
Account Debit Credit
Purchases 4,000
Accounts payable 4,000
Total 4,000 4,000

Buy Goods on Credit Bookkeeping Entries Explained

Debit – What came into the business
The goods came into the business and will be held as part of inventory until sold.

Credit – What went out of the business
The liability to the supplier is increased by the value of the goods purchased.

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Fixed Asset Purchase Accounting Equation
Assets = Liabilities + Owners Equity
Purchases of Goods = Liability to Supplier + None
4,000 = 4,000 + 0

In this case both the assets and the liabilities are increased by the same amount when you buy goods on credit.

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Last modified July 16th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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