A business can make a cash purchase using either cash, cheque or bank transfer. The payment to the supplier is immediate at the time of purchase, there is no credit given by the supplier for the goods. This type of cash purchase double entry transaction is common in small businesses and retail stores, where customers pay for goods immediately.
To illustrate suppose for example the cash purchase of goods is for 1,000 by immediate bank transfer.
How to Record the Cash Purchase of Goods
The accounting records will show the following bookkeeping entries when the business makes the purchase of goods:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 1,000 | |
| Cash | 1,000 | |
| Total | 1,000 | 1,000 |
Cash Purchase Journal Entry Explained
The cash purchase double entry is explained as follows.
Debit Entry
The goods came into the business and will be held as part of inventory until sold. It is important to realize that this journal entry assumes the business operates a perpetual inventory system. Consequently the debit entry is to inventory,.
Credit Entry
Cash went out of the business with the cash purchase. this entry reflects the reduction in the cash balance when the supplier is paid.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities plus the equity 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 assuming the goods have not yet sold, one asset (inventory) will have increased and another asset (cash) will have decreased by the same amount. It is important to realize that both entries affect assets of the business.
Popular Double Entry Bookkeeping Examples
Cash purchase journal entries are just one type of bookkeeping transaction. Discover another double entry bookkeeping example at the links below..
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.