In this article you will get to know about Journal Entries for Purchases. In any business, maintaining a precise record of purchases holds significant importance. This record serves as the foundation for crucial decisions related to manufacturing and sales.
To document these purchases accurately, we employ journal entries. In these journal entries, purchases are considered as inventory, essential for manufacturing or sale. They are categorized as current assets and not considered purchases of fixed assets.
Let’s explore the primary journal entries for recording purchases:
JOURNAL ENTRY FOR CASH PURCHASES
When goods are acquired with cash, there’s no need to document the supplier, as the purchase is already made directly with cash. The following journal entries are used when the payment is made:
Purchase Account Debit
Bank/Cash Account Credit
JOURNAL ENTRY FOR CREDIT PURCHASES
When purchases are made on credit, it’s essential to record details of the creditor, as payment to the creditor will occur in the future. This entry helps keep track of the outstanding liability to creditors:
Purchase Account Debit
Creditor Account Credit
JOURNAL ENTRY OF PURCHASE RETURN
In the event of returning goods due to defects or other reasons, a purchase return occurs. The following entry is used:
Creditor / Cash / Bank Account Debit
Purchase Return Account Credit
JOURNAL ENTRY OF PURCHASE WITH GST (GOODS AND SERVICES TAX)
This entry is used when goods are purchased, and both the purchase value and GST input are paid. Here’s how it is recorded:
Purchase Account Debit
Input CGST Account Debit
Input SGST Account Debit
To Bank/Creditors Account Credit
Goods and Services Tax (GST) is a unified indirect tax system that consolidates all indirect taxes in the Indian economy. GST operates on a destination-based consumption model, where it is applied at every stage of the supply chain when value is added to goods or services.
Suppliers of goods or services can offset the GST charges against the taxes they paid in the previous stages, thanks to the tax credit mechanism. Ultimately, the final dealer passes on the accumulated GST to the end consumer of the goods or services.
There are three primary types of taxes under the GST framework:
Central Goods and Services Tax (CGST):
This is the GST imposed by the Central government on the supply of goods or services within the same state, known as Intrastate supply.
State Goods and Services Tax (SGST):
SGST is the counterpart to CGST, levied by the State government (including Union Territories with legislatures) on Intrastate supplies of goods or services within the state.
Integrated Goods and Services Tax (IGST):
IGST is collected and administered by the Central government, and it applies to Interstate supplies of goods or services. In simpler terms, IGST is the sum of CGST and SGST.
For accounting purposes, GST is classified into four categories:
- Input CGST/SGST: This is the tax paid on purchases of goods and services within the same state (Intrastate). It can be offset against Output CGST/SGST, which represents the GST collected on sales.
- Input IGST: Input IGST is the tax paid on purchases of goods and services that involve transactions between different states (Interstate). It is adjusted against Output IGST, which represents the GST collected on sales.
- Output CGST/SGST: Output CGST/SGST is the GST collected on sales or supplies made within the same state (Intrastate).
- Output IGST: Output IGST represents the GST collected on sales or supplies made between different states (Interstate).
Goods and Services Tax is a comprehensive indirect tax system that simplifies and streamlines taxation in India. It encompasses CGST, SGST, and IGST, each with its specific application, and plays a vital role in the accounting and financial operations of businesses across the country.
PURCHASE RETURN WITH GST
When there is a purchase return, the GST input account is adjusted based on the purchase return amount:
Cash/Bank / Creditor Account Debit (Value of Purchase return + GST input on purchase return)
Purchase Return Account Credit (Value of Purchase return)
GST Input Account Credit (GST on Purchase return)
These journal entries are essential for maintaining accurate financial records and complying with taxation regulations. They facilitate the tracking of purchases, payments, and liabilities, ensuring transparency in financial reporting.
RELATED ARTICLE
JOURNAL ENTRIES WITH EXAMPLES
JOURNAL ENTRIES FOR SALES
CONCLUSION JOURNAL ENTRIES FOR PURCHASES
By reading this article you will get to know about Journal Entries for Purchases. If you have any questions kindly comment below.