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
For a business operating a perpetual inventory system the accounting records will show the following bookkeeping entries when you buy goods on credit from a supplier:
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.
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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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 and has built financial models for 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 degree from Loughborough University.