This lesson explains what a purchase journal is, how it is used, and what types of transactions are recorded in a purchase journal. Several different examples of purchase journal postings are included.
What is a Purchases Journal?
During the normal course of business, many companies will purchase items on credit. When items are purchased on credit or on account, the transaction is recorded in the accounting records in the purchases journal. A purchases journal is a specialized type of accounting log that keeps track of orders made by a business on credit or on account. Cash purchases for inventory are not tracked in the purchases journal.
The amount of detail provided in a purchases journal is determined by the type of purchase and products received. Individual items are not usually recorded if they are small amounts and purchased with other items. Neither does the purchases journal track the amount of money owed on account to a supplier.
For instance, if you own a furniture store and make an order for 10 sofas on account, the order will be reflected as a journal entry that will include one debit and one credit; the sofas will not be individually recorded in the purchases journal as 10 separate entries. Nor will the balance of your account with the furniture supplier show in the purchases journal. In this instance, because the order was for inventory, the posting in the account will be credit to accounts payable and a debit to inventory.
Let's take a look at a couple of other examples of a purchases journal being used.
Imagine you own a lumber yard and are running low on several different types of wood. You have accounts with many of your suppliers and decide to order additional stock before the spring months arrive and the demand for wood increases. You place 3 different orders, totaling $13,500 of wood.
An order to Would Wood in the amount of $2,000
An order to Wood Stockers for $3,500
An order to Builder's Supply for $8,000
The orders arrive the next day and, upon receipt, you record them in the purchases journal. Because you made and received 3 orders, you will enter three transactions to the journal which will total a debit of $13,500 to purchases and a credit of $13,500 to accounts payable. The debit will be made to the purchases log because the wood you ordered is considered inventory, intended for direct resale to your customers. Each of the transactions is posted separately to give you a chance to identify which vendor account is being affected. Here's a visual example of how these transactions might be recorded in the purchases journal:
Not all transactions logged in the purchases journal will result in a debit to the purchases account. It depends on the type of purchase what type of account is debited.
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For instance, let's now pretend that you own a jewelry manufacturing business that makes costume jewelry in large quantities for discount stores throughout America. Your clients are all stores that carry your line and typically pay you within 30 days. To keep production going, you have set up accounts with your supply vendors with equal terms to ensure that you can have enough chain, jewels, clasps, and other supplies on hand to fill orders as they come in.
You recently received a larger order than you expected. To meet the unexpected need, you have called one of your suppliers and placed a large order for $25,000 in supplies to create your jewelry pieces. Because you have a long-standing arrangement with the supplier, they allow you to make a last-minute, rush order on credit. They deliver the supplies to your business later that afternoon and you get to work on manufacturing the jewelry. In a hurry to make the jewelry, you decide to log the invoice in the purchases journal because it's a quicker notation than updating all of the general ledgers separately AND you made the order on account with the supplier.
Compared to other accounting notations, the entry in the purchases journal is a relatively simple one - just a credit to the accounts payable log and a debit to the Cost of Goods Sold (COGS) account, rather than the purchases account. The COGS log includes all expenses that your company incurs for the production of the jewelry. Because the order was for supplies used to create jewelry, those items are part of the COGS that will add to the cost of making the jewelry. You make a debit entry for $25,000 for COGS and a credit entry for $25,000 for accounts payable in the purchases journal:
Cost of Goods Sold
A purchases journal is a specialized type of accounting log that keeps track of orders made by a business on credit or on account. Cash purchases for inventory are not tracked in the purchases journal.
Postings will include both a credit and a debit within the log. Credits are most often made to the accounts payable account, while debits may be made to the purchases account or the Cost of Goods Sold (COGS) account; the COGS log includes all expenses that your company incurs for the production of a product.
At the end of the month, credits and debits are tallied for the types of accounts and, along with other details of the transactions, are posted to other journals in the accounting records.
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