Which account is debited when we purchase merchandise?

When a business purchases goods or services on credit, the business will then debit the purchases account, which will increase the business’s assets.

The business will also credit the accounts payable account, which will increase the business’s liabilities.

This transaction would lead to the following journal entry.

DateAccount NameDebitCreditxx/xx/XXXXPurchases$xxAccounts Payable$xxThe business purchased bicycle tires on credit on xx/xx/XXXX for $xx.

When the business pays the vendor for the purchase, the accounts payable account will be debited, and the cash account will be credited.

The journal entry for this transaction is as follows.

DateAccount NameDebitCreditxx/xx/XXXXAccounts Payable$xx     Cash$xxPaid $xx for purchase made on credit on xx/xx/XXXX.

Example of Purchase Credit Journal Entry

Suppose there is a company that manufacturers and sells electric bicycles.

This company purchases some tires on November 10th, 2021, from a vendor on credit for $5,000.

The company supplying the tires expects to be paid within 30 days of the purchase.

The electric bicycle company will need to record this transaction.

Entry

When the electric bicycle company purchased bicycle tires from a vendor on November 10th, 2021, the company debited the purchases account for $5,000 and credited the accounts payable account for $5,000.

The electric bicycle company paid $5,000 to the tire company on November 30th, 2021.

At this point, the electric bicycle company debited the accounts payable account for $5,000 and credited the cash account for $5,000.

The journal entries for the purchase and payment of the tires are as follows.

Purchase

DateAccount NameDebitCredit11/10/2021Purchases$5,000Accounts Payable$5,000Purchase of bicycle tires on 11/10/2021 for $5,000 on credit

Payment

DateAccount NameDebitCredit11/30/2021Accounts Payable$5,000     Cash$5,000Paid $5,000 on 11/30/2021 for bicycle tires purchased on 11/10/2021

Advantages and Limitations

Purchase Credit Journal Entry Advantages

• When goods are purchased on credit, recording the transaction of the goods or services helps the business to keep track of their credit purchases.
• Keeping track of these purchases allows a business to look up how much they owe on the purchase simply by looking up the transaction through the date and vendor involved.

Purchase Credit Journal Entry Limits

• People record purchase credit journal entries, and people make mistakes. Therefore, there is always the possibility that an error could occur. If an error does occur, the wrong transaction ends up in the purchases journal.
• For large companies with many transactions, the chance of an error occurring increases considerably

Conclusion

A business records a purchase credit journal entry in its purchases journal at the time it purchases goods on credit from its vendors.

When the business makes a purchase on credit, it debits the purchases account in its purchases journal, which will show up on the business’s income statement.

This amount will be credited to the accounts payable account because it is a credit purchase, and the business’s liabilities will increase with this purchase which will show up on the business’s balance sheet until the business finishes paying off the debt.

Key Takeaways

• If a business purchases goods on credit, the business will debit the purchase account, which will result in an increase in its inventory because the goods are purchased from a third party.
• When a business makes a purchase on credit, the accounts payable account is credited in the purchases journal. This results in the business’s liabilities increasing, which will show up in the business’s balance sheet until the debt is paid.

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The company passes Purchase Return Journal Entry to record the return transaction of the merchandise purchased from the supplier. Here the cash account debits in case of the cash purchases or the accounts payable account in case of the credit purchases, and the purchase return account will be credited in the company’s books of accounts.

Table of contents

• What is the Purchase Return Journal Entry?
  • How to Make Journal Entries of Purchase Return?
  • Example of Purchase Return Journal Entry
  • Advantages of Purchase Return Journal Entry
  • Disadvantages of Purchase Return Journal Entry
  • Important Points
  • Conclusion
  • Recommended Articles

How to Make Journal Entries of Purchase Return?

When the company is purchasing goods from the supplier, then in books of accounts, there will be a debit in the purchases account as it will increase the company’s inventory (assets). There will be credit in the Cash account if purchased in cash or the accounts payable accountAccounts Payable AccountAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more if purchases have been made on credit from the third party (supplier). The Journal Entry to record Purchase is as below:

Purchases in Cash

Particulars Dr ($)Cr ($)Purchase A/C …..DrXXX                   To Cash A/C XXX

Purchases on Credit

Particulars Dr ($)Cr ($)Purchase A/C …..DrXXX            To Accounts Payable  A/C XXX

Now, when the company returns the goods against the purchases made previously, then the cash account or accounts payable account for the cash purchases or credit purchases, respectively, will be debited with a corresponding credit to the purchase return account as there is the return of the goods out of the company to the supplier. Therefore, the book-entry to record the return against the purchase of goods by the company is as follows:

Purchase Return of Goods Purchased in Cash

Particulars Dr ($)Cr ($)Cash A/C …..DrXXX            To Purchase Return  A/C XXX

Purchase Return of Goods Purchased on Credit

Particulars Dr ($)Cr ($)Accounts Payable A/C …..DrXXX            To Purchase Return  A/C XXX

Example of Purchase Return Journal Entry

Let’s take an example of a purchase return journal entry.

You can download this Purchase Return Journal Entry Excel Template here – Purchase Return Journal Entry Excel Template

Company A ltd. purchased goods from suppliers worth $ 150,000 on 1st September 2019 by paying the cash with the condition that goods can be returned only within 15 days from the date of purchase. On 13th September 2019, A ltd returned the goods to the supplier. Pass the necessary journal entry in the company’s books of accounts to record the purchase of goods and return of such goods to the supplier?

Solution:

On 1st September 2019, when goods were purchased in cash from the supplier, the purchase account will be debited, and the cash account will be credited. The entry is as follows:

On 13th September 2019, when the goods are returned to the supplier, the cash account will be debited with a corresponding credit to the purchase return account. There is the return of the goods out of the company to the supplier. The entry to record such purchase return is as below:

Advantages of Purchase Return Journal Entry

The different advantages related to the purchase return journal entry are as follows:

• It helps the company record every transaction involving the return of the goods purchased by the company either in cash or credit from its supplier, thereby keeping all the track of the same.
• When the company is recording the return of the purchases, it can reduce the balance of such purchase returns from the inventory balance to know the exact balance or the status of the inventory present in the company at a particular point in time.

Disadvantages of Purchase Return Journal Entry

The disadvantages related to the Purchase Return Journal Entry are as follows:

• The recording of a purchase Return journal entry involves the intervention of a human, so chances prevail that the person engaged in recording such a transaction may commit a mistake in such recording, which will ultimately present the wrong picture of the company.
• In the case of the companies where there are many returns, it becomes time-consuming to record every such entry.

Important Points

The different essential points related to the Purchase Return Journal Entry are as follows:

• When they are returned to the supplier of the goods, the cash account or accounts payable account for the cash purchases or credit purchases will be debited with a corresponding credit to the purchase return account as there is the return of the goods out of the company to the supplier.
• To know the exact balance of the inventory present in the company at a particular point in time, the company can reduce the balance of such purchase returns from the inventory balance.

Conclusion

Thus the purchase return journal entries are recorded in the company’s books of accounts when the goods purchased either on cash or credit are returned to the supplier of such goods.

When the goods are purchased in cash or credit, then the purchases account will get debited in the company’s books of accounts which will be shown in the income statement of the companyIncome Statement Of The CompanyThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more and the cash account or accounts the payable account will be credited because it will either reduce the cash in case of cash purchases or it will create the liability of the company in case of credit purchases. Now, when the company returns the goods against the purchases made previously, then the cash account or accounts payable account for the cash purchases or credit purchases, respectively, will be debited with a corresponding credit to the purchase return account as there is the return of the goods out of the company to the supplier.

Recommended Articles

This article has been a guide to purchasing return journal entries. Here we discuss an example of a purchase return journal entry along with its advantages & disadvantages. You can learn more about accounting & bookkeeping from the following articles –

What account is debited to record the cost of merchandise purchased?

What account is merchandise purchase?

Is merchandise inventory debited?

Is purchase account debited?