🔍 What Is the Purchase Account?
The Purchase Account records all goods bought for resale purposes. Even though these goods are technically purchase, accounting treats as expenses because they are used to generate income.
🛍️ What Do We Mean by “Goods”?
In everyday language, “goods” can mean anything from land to electronics. But in accounting, “goods” refer specifically to items bought for resale. For example:
- A car bought by a car dealer = goods
- The same car bought by a clothing retailer = fixed asset
🧠 Accounting Principle Behind This
The Matching Concept states:
Only costs that helped generate revenue during the period should be shown as a expenses.
That’s why:
- Sold goods → recorded as expenses (Cost of Goods Sold)
- Unsold goods → remain assets (Inventory)
⚠️ Why Not Use One Single “Goods” Account?
Imagine this:
- You bought 10 printers @ $1,000 each = $10,000
- You sold 8 printers @ $1,200 each = $9,600 in revenue
- 2 printers are unsold (worth $2,000)
If you simply credit the full sales amount into the “Goods Account” you mix up profit with inventory, making the closing balance of this account inaccurate.
Solution? Split into multiple accounts:
- Purchase Account
- Sales Account
- Purchase Return
- Sales Return
🧾 Sub-Division of Goods Accounts
| Account | Nature | Purpose |
|---|---|---|
| Purchase Account | Expense | Record goods bought (cash/credit) |
| Sales Account | Income | Record goods sold (cash/credit) |
| Purchase Return A/c | Contra-expense | Record returned goods to suppliers |
| Sales Return A/c | Contra-income | Record goods returned by customers |
📘 Journal Entries (Double Entry Examples)
Let’s work through an actual set of July transactions and prepare journal entries based on the double-entry system.
🔢 July 20X9 Transactions
| Date | Description | Entry Type |
|---|---|---|
| July 1 | Bought goods on credit from Mr. Johan $520 | Purchase |
| July 2 | Bought goods on credit from A Mike & Son $470 | Purchase |
| July 5 | Sold goods on credit to Mr. Bonson $90 | Sale |
| July 6 | Sold goods on credit to Ms. Victoria $95 | Sale |
| July 10 | Returned goods to Mr. Johan $35 | Purchase Return |
| July 11 | Sold goods for cash $200 | Cash Sale |
| July 12 | Bought goods for cash $250 | Cash Purchase |
| July 19 | Ms. Victoria returned goods $18 | Sales Return |
| July 21 | Sold goods for cash $185 | Cash Sale |
| July 23 | Paid Mr. Johan $200 | Payment to Creditor |
| July 28 | Received $70 from Mr. Bonson | Collection from Debtor |
| July 31 | Bought goods on credit from A Mike & Son $140 | Purchase |
🧾 Journal Entries (Double Entry Format)
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| July 1 | Purchase A/c | 520 | |
| To Mr. Johan A/c | 520 | ||
| July 2 | Purchase A/c | 470 | |
| To A Mike & Son A/c | 470 | ||
| July 5 | Mr. Bonson A/c | 90 | |
| To Sales A/c | 90 | ||
| July 6 | Ms. Victoria A/c | 95 | |
| To Sales A/c | 95 | ||
| July 10 | Mr. Johan A/c | 35 | |
| To Purchase Return A/c | 35 | ||
| July 11 | Cash A/c | 200 | |
| To Sales A/c | 200 | ||
| July 12 | Purchase A/c | 250 | |
| To Cash A/c | 250 | ||
| July 19 | Sales Return A/c | 18 | |
| To Ms. Victoria A/c | 18 | ||
| July 21 | Cash A/c | 185 | |
| To Sales A/c | 185 | ||
| July 23 | Mr. Johan A/c | 200 | |
| To Cash A/c | 200 | ||
| July 28 | Cash A/c | 70 | |
| To Mr. Bonson A/c | 70 | ||
| July 31 | Purchase A/c | 140 | |
| To A Mike & Son A/c | 140 |
✅ Key Rules for Double Entry System
| Type of Account | Debit Rule | Credit Rule |
|---|---|---|
| Personal | Debit the receiver | Credit the giver |
| Real | Debit what comes in | Credit what goes out |
| Nominal | Debit all expenses/losses | Credit all incomes/gains |
🔚 Conclusion
Every business must follow the double-entry system to ensure accurate and balanced financial records. By correctly categorizing purchase and sales-related transactions and also understanding the principles behind debit and credit, you keep your accounts accurate, transparent, and compliant.