Journal entry for purchase of merchandise on account

Introduction

In merchandising business, we usually make a lot of purchases of merchandise on account as we may provide many credit sales to our customers too. Likewise, we need to make the journal entry for merchandise on account by either recording the purchased merchandise into the purchases account or inventory account.

If we use the periodic inventory system, we need to record the merchandise that we purchase into the purchases account. This is due to under the periodic inventory system, the balance of inventory or merchandise inventory will only be updated periodically which is usually at the end of the accounting period.

On the other hand, if we use the perpetual inventory system, we can record the merchandise purchased immediately into the inventory account. Additionally, there usually won’t be a purchases account in the chart of accounts for this purpose if we use the perpetual inventory system.

Journal entry for purchase of merchandise on account

Periodic inventory system

We can make the journal entry for the purchase of merchandise on account by debiting the purchases account and crediting the accounts payable if we use the periodic inventory system.

Purchase of merchandise on account

In this journal entry, the purchases account is a temporary account, in which its normal balance is on the debit side. This account will be cleared at the end of the period when we perform the physical count of the inventory and calculate the cost of goods sold to close the year-end account.

Likewise, we do not record the purchased merchandise into the inventory account at the time of the purchase. As the name suggested, under the periodic inventory system, we only update the balance of inventory periodically.

Later, when we make the payment to settle the recorded accounts payable, we can make the journal entry for the payment of accounts payable with the debit of accounts payable and the credit of the cash account.

Payment of accounts payable

This journal entry will reduce both total assets on the balance sheet as the result of cash outflow from the business for the payment as well as reduce the total liabilities in the same amount as the result of reducing the balance of accounts payable.

Perpetual inventory system

On the other hand, if we use the perpetual inventory system in our account instead of periodic inventory system, we need to record the purchased merchandise into the inventory account at the time of the purchase.

Likewise, we can make the journal entry for the purchase of merchandise on account under the perpetual inventory system with the debit of merchandise inventory account and the credit of accounts payable.

Purchase of merchandise on account

In this journal entry, both total assets and total liabilities on the balance sheet increase by the same amount.

The same as before, when we make the payment later to settle this credit purchase, we will debit the accounts payable and credit the cash account in our journal entry as below:

Payment of accounts payable

This journal entry will eliminate the accounts payable that we have previously recorded for the purchase of merchandise on account. Likewise, the total liabilities on the balance sheet will be reduced accordingly.

Purchase of merchandise on account example

For example, on January 1, we make a $5,000 purchase of merchandise on account from one of our suppliers. Later, on January 20, we make the cash payment of $5,000 to settle this credit purchase without any discount received.

What is the journal entry for the purchase of merchandise on account and payment above if:

• we use the periodic inventory system
• we use the perpetual inventory system

Solution:

Periodic inventory system

If we use the periodic inventory system, we can make the journal entry for the $5,000 purchase of merchandise on account by debiting this amount into the purchases account and credit the same amount into the accounts payable on January 1, as below:

January 1:

Later, when we make the cash payment to settle this debt on January 20, we can make the journal entry for payment of accounts payable as below:

January 20:

Perpetual inventory system

If we use the perpetual inventory system instead, we need to record the $5,000 purchase of merchandise on account in the example above into the merchandise inventory account on January 1.

January 1:

In this journal entry, both total assets and total liabilities on the balance sheet increase by $5,000 as of January 1.

The same as above, when we make the cash payment of $5,000 for this merchandise on January 20, we can debit the $5,000 into the accounts payable and credit this same amount into the cash account.

January 20:

After this journal entry, the total assets on the balance sheet will decrease by $5,000, and total liabilities will decrease by the same amount as of January 20.