Inventory Purchase Journal Entry

2 Responses

1. Certainly! The confusion here comes from the terminology. In this context, the “Purchases” account you’re debiting is usually a temporary account that ultimately affects Inventory.

   When you purchase goods, your journal entries work like this:

   1. Initial Purchase Entry:
   2. Debit Purchases: This is where you’re recording the cost of goods purchased, which will eventually lead into inventory.
   3. Credit Accounts Payable/Cash: This reflects that you’ve either bought on credit or paid in cash.

   So for your initial entry:
   Purchases Dr 1000
Cash/Accounts Payable Cr 1000

   At this point, you have accounted for the purchase, but you need to move those goods into the Inventory account.

   1. Recording Inventory:
   2. At the end of the Accounting period, you would typically adjust the Inventory account to reflect the purchases. This would show that inventory has increased by the amount recorded in the Purchases account.

   So, you would make an additional entry often at the end of the period to transfer the purchases to inventory:
   Inventory Dr 1000
Purchases Cr 1000

   After this adjustment, your Inventory account reflects that you have goods worth 1000 on hand.

   1. When you sell goods:

   2. Record the sale:
      Cash Dr 1100
Sales Revenue Cr 1100

   3. And then record the cost of goods sold:
      Cost of Goods Sold Dr 1000
Inventory Cr 1000

   Now, your flow of transactions looks like this:

   • Purchasing Goods:

     • Debit Purchases → Credit Cash/Accounts Payable
     • Debit Inventory → Credit Purchases (to reflect goods in inventory)

   • Selling Goods:

     • Debit Cash → Credit Sales Revenue (for the sale amount)
     • Debit Cost of Goods Sold → Credit Inventory (to reflect the reduction in inventory due to the sale)

   So in summary, the flow of journal entries moves from recording a purchase to transferring it to inventory, and then when sales occur, it reduces inventory and records the cost of goods sold. This ensures that your financial statements accurately reflect your business’s inventory levels and expenses.

   Log in to Reply

2. Thank you for sharing your question! It’s a common point of confusion for many when dealing with journal entries related to inventory.

   In Accounting, the “Purchases” account is generally used in a periodic inventory system. When you debit the Purchases account, you are indeed recording the cost of goods acquired, but your inventory balance doesn’t show an immediate increase until the Accounting period ends and you adjust for your total purchases during the period.

   In a perpetual inventory system, however, the journal entry for inventory purchases would directly debit the Inventory account instead of using the Purchases account. So your journal entry would look like:

   – **Debit Inventory**: $1,000
   – **Credit Cash/Accounts Payable**: $1,000

   This treatment keeps the inventory balance updated in real-time. Then, when you sell those goods, the Cost of Goods Sold entry reflects the decrease in inventory, showing it was sold and allowing for accurate tracking of your inventory levels.

   So, to clarify the flow in your case: when you eventually prepare your financial statement at the end of the period, you will have to adjust your Inventory account to reflect your Purchases (debit) and reduce it by what you’ve sold (credit). This way, your inventory reflects the actual quantity on hand.

   If you’re trying to decide between methods, consider the size of your business and the volume of transactions, as this may guide whether a periodic or perpetual inventory system is more efficient for you. Hope this helps clarify the

   Log in to Reply