Purchases, payables and cash

This chapter extends your understanding of double-entry bookkeeping by focusing on how to record transactions related to purchases, payables, and cash.

Learning objectives

By the end of this chapter, you should be able to:

• Record purchase transactions and purchase returns in the general ledger accounts.
• Identify and explain examples of receivables.
• Account for discounts received.

Purchases

Purchases are goods or services a business acquires from suppliers as part of its normal operations. Purchases may be:

1. paid for immediately, known as cash purchases, or
2. settled later, known as credit purchases.

Payables

Credit purchases create payables (also called accounts payable). Credit purchases are first recorded in the purchases daybook, based on invoices received from suppliers.

Definitions

Payable

It is the amount a business entity owes to its suppliers (i.e., known as creditors). The payables ledger records transactions owed to the various creditors, either individuals or institutions. Hence, just as a receivables ledger, this is also classified as a personal ledger. The amount owed to each supplier arising from the credit purchases is recorded in the payables ledger account.

In double-entry bookkeeping:

• A credit purchase affects both the purchases ledger account and the payables ledger account.
• A cash purchase affects the purchases ledger account and the cash (or bank) ledger account.

When you later pay a supplier for an earlier credit purchase, the payables balance decreases to show the remaining amount owed.

Purchases returns

Definitions

Purchase returns (return outwards)

Occurs when goods bought are returned to suppliers due to defects, excess, or quality issues.

When goods are returned, suppliers issue debit notes. These returns are recorded in the purchase returns daybook. Purchase returns reduce the original payable, and in double-entry bookkeeping, they affect both the purchase returns ledger account and the payables ledger account.

Summary of double-entry bookkeeping accounting

Below is a summary of the journal entries on the basis of the double-entry bookkeeping for purchases and payables.

For every cash purchase:

• Debit: Purchases ledger account
• Credit: Cash or Bank ledger account For every credit purchase:
• Debit: Purchases ledger account
• Credit: Payables ledger account For every subsequent cash payment made to the supplier for an earlier credit purchase:
• Debit: Payables ledger account
• Credit: Cash or Bank ledger account For every purchase return:
• Debit: Payables ledger account
• Credit: Purchase returns ledger account

Illustration: Walkthrough

Below is a list of transactions undertaken by Jonko Ltd.

1. Credit purchases from ABC Suppliers - $15,000
2. Paid ABC Suppliers $10,000
3. Credit purchases from XYZ Ltd - $8,500
4. Returned defective goods to XYZ Ltd - $1,200

The opening balance of the payables at the start of the period was $6,000. Required:

1. Prepare journal entries (without description) to recognise each transaction.
2. Prepare the purchases and purchase return ledger accounts.
3. Prepare the trade payables ledger account and determine the closing balance. Suggested solution:

Do you know the journal entry for transaction 1?

Do you know the journal entry for transaction 2?

Do you know the journal entry for transaction 3?

Do you know the journal entry for transaction 4?

The ledger accounts

• Prepare and balance the purchases ledger account

• Prepare and balance the purchase return ledger account

• Prepare and balance the accounts payable ledger account

Discounts received

Definitions

Discount received

It represents a cash/settlement discount earned by paying suppliers within the discount period.

Unlike discount allowed (where the amount recognised for sales may depend on expected customer payment timing), credit purchases are recorded at the gross amount.

If payment is made within the settlement period, the accounting records are adjusted to recognise the discount received. This reduces:

• the cash paid, and
• the payable balance.

The discount received is mainly the cash settlement discount received from suppliers. Journal entry for recognizing discount

Debit: Payables ledger account (with the full amount)
Credit: Cash or bank ledger account (with the amount paid)
Credit: Discount received ledger account (with the discount earned)

The discount received appears as other income on the statement of profit and loss, reducing expenses and increasing net profit.

Illustration

On 1 Jan. 2023, Jentro Company Ltd acquired an item worth$1,000 on credit from a supplier and was offered payment terms of 2% discount if paid within 30 days. Before the end of the month, Jentro makes a payment for the item acquired. Upon purchase of the item:

	Debit ($)	Credit ($)
Purchases	1,000
Payables		1,000
Being credit purchases

Upon payment before the month end:
Since Jentro Company paid within the 30-day discount period, the actual payment will be $980 instead of the full $1,000. The difference of $20 represents a discount received by the company.

	Debit ($)	Credit ($)
Payables ledger account	1,000
Cash/bank ledger account		980
Discount received		20
Being payment made to credit supplier

Accounting for cash

Business transactions involve money inflows (receipts) and outflows (payments). These may occur as physical cash or through banks and other financial institutions.

In accounting, these movements are recorded in the cash book, which serves as both:

• a book of prime entry, and
• a ledger account.

When treated as a ledger, it is called the bank or cash account. In this chapter, we will use “bank” to describe receipts and payments of money. Receipts are debited, while payments are credited.

Petty cash

Petty cash is a small amount of cash kept to pay minor expenses such as office supplies. Even though each payment is small, the total can still affect overall cash balances, so petty cash needs to be recorded and controlled. Petty cash is usually managed under the imprest system.

The imprest system

The imprest system manages petty cash by setting aside a fixed amount, called the “float,” for a petty cashier. This float is used to pay small expenses, and a receipt or voucher is kept for every payment. Each transaction is recorded in a petty cash book, including details such as the date, purpose, amount, and recipient.

When the balance falls to a minimum level (typically 15 to 25% of the float), the petty cashier submits a summary of expenses with supporting documents for reimbursement. The business then reimburses the exact amount spent, restoring the fund to its original level.

At all times:

• remaining cash + receipts (vouchers) = imprest amount.

This system promotes accountability, helps prevent misuse, and provides a clear audit trail for small expenditures.

Reasons for keeping petty cash records

• To provide accountability for all money spent, ensuring that funds are used appropriately and not misused or misplaced.
• Allow businesses to track patterns in small expenditures, potentially identifying areas where costs can be reduced.
• Help managers forecast future petty cash needs and allocate appropriate funds in budgets.
• To establish when and how the petty cash fund needs to be replenished.
• Reduces the risk of theft or fraud by creating transparency around cash handling.
• Help categorize expenses appropriately for accounting purposes.