Accounting For Purchases

THE SYSTEM OF
ACCOUNTING
Volume III
WRITTEN BY:
SYED AQEEL RAZA

MASTER OF COMMERCE & POLITICS
PURCHASES 1
ACCOUNTING FOR PURCHASES

The purchase is the result of exchanging values
for material and work by means of money or its
equivalent for the satisfaction of need and for
generating profit in business by the process of
purchasing and selling. There are three types
of businesses involve purchases and sells as in
trading business, the person purchases goods
and sells it in anticipation of gain, in
manufacturing
business,
the
concern
purchases materials, gives it any shape and
sells and in services business which has no
purchase apparently but actually the services
which are given to service provider are the
purchases for which the concern who does
purchase the services pays money to service
provider.
The purchases for business is considered a kind
of temporary asset involve in profit and loss
under income statement. It may also be said a
kind of expense because of purchasing for
goods or expense for goods involves in the cost
of goods sold and can also say it the helping
tool for generating profit.
Purchase plays an important role in accounting.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL

RAZA<aqeelraza@live.com>
PURCHASES 2
The purchase is debited to purchase account

which increases in expense or temporary asset
and cash does credit to a cash account which
decreases the assets of an entity.
There may be following
purchasing in accounting;
three
kinds
of
1-PURCHASE FOR PERSONAL

2-PURCHASE FOR BUSINESS
3-PURCHASE FOR EXPENSES
PURCHASE FOR PERSONAL
No purchase is allowed in business for personal
use and if the proprietor does purchase
something or takes anything from the
purchased goods, he will be withdrawing his
capital or goods at value.
If the owner or partner draw cash, the drawing
is debited to drawing account; drawing is a
contra capital account; and cash is credited
which is a current asset and asset is decreasing

as;
Purchase moves accounting cycle.
PURCHASES 3
Drawing (Cash)/debit
Cash (credit)/asset
In case of drawing goods by owner, the
drawing reduces merchandise at the value to
Inventory account.
Drawing (Stock) /debit
Inventory (credit)
At the end of the period or in balance sheet the
drawing account is reduced by owners equity
or capital account as;
Capital (Cash)/debit
Drawing (Cash)/credit
Capital (Stock)/debit
Drawing (Inventory/Credit
No purchase is allowed in business for personal

use.
PURCHASES 4
PURCHASES FOR BUSINESS:

-
Merchandise for trading

Materials for manufacturing
Assets for business
Work against services
Direct purchases
Goods Receipt Note (GRN)
Debit Note
Account payable aging
Merchandise for Trading

In trading business, merchandise is purchased for
sale against profit. The trading business involves a
person or persons who buy products and sell to
customer and links with manufacturers and service
providers.
Materials for manufacturing
The manufacturing business deals with materials

wherein manufacturer does purchases materials for
making goods which he wants to make something
and then sells to traders, whole sellers and also to
retailers. The manufacturing business requires
manpower which is provided by services business in
the shape of employees.
Thus, manufacturing
business needs the help of trading and services. It
also requires land, building, plant and machinery for
operation.
The purchase is made for sale against profit.

PURCHASES 5
Assets for business

In order to operate any business, assets are
purchased like land, building, plant, machinery,
furniture, office equipment, air conditioners,
etc. etc. The depreciation does contra to the
most of the assets.
Direct Expenses
Most of the purchases involve in cartage
wages, labor, customs duty, octroi, taxes etc.
are the direct expenses which we can say that
the direct purchase is because of adding in the
price of goods purchased and add in the
purchase in the income statement.
Work against services

The
plant,
machinery,
furniture,
office
equipment or any asset requires services for
installation, inspection, fixing and like these
works the services are purchased for the time
being and the cost includes in the asset
purchased. It does not belong to profit and loss
but become the part of the asset.
Direct expenses are involved in business
purchase.
PURCHASES 6
PURCHASES FOR EXPENSES

Actually, the expenses which are paid for
operating business activities decrease income
or increase loss than in other words we can say
that the expenses belong to profit and loss as
low expense high profit or high expense low
income.
The purchases are made for operating business
activities as to works and goods, reduce
income and do not belong to merchandise.
TYPES OF PURCHSAES
All purchases revolve around cash purchases
and credit purchases and any purchase can be
made in cash or on credit.
- Cash Purchases
- Credit Purchases
The purchase against expense is the part of
income.
PURCHASES 7
Cash Purchases
The cash purchase is the purchase which is
made on payment against getting anything on
the spot or exchange of value on the spot.
When a cash purchase is made, the following
double entry is made;
Purchases (Debit/Income Statement)
Cash (Credit/Asset)
The purchase is debited to purchase account

which belongs to the cost of goods sold and
cash is credited to cash account decreases
assets of an entity.
Credit Purchase
Credit purchase is the purchase which is made
later under an agreement or mutual
understanding of seller and purchaser. Like this
purchase, goods are obtained without paying
cash and cash is paid later.
Cash purchase orders payments on the spot but credit on
later.
PURCHASES 8
The credit purchase is the liability of purchaser

and asset of seller when it made, the following
double entry is made;
Purchase (Debit)/Income Statement
Account Payable (Credit) Liability
When the liability is paid, the balance in
payable account will be reduced and to zero as;
Account payable (Debit)/Liability

Cash (Credit)/Asset
The result of purchase is to increase in

purchase account or expense account and
decrease in an asset of the entity. A purchase
also results in the increase of inventory
requires further discussion.
The result of purchase is to pay money.
PURCHASES 9
THE PROCEDURE OF PURCHASING AND

RECORDING
The following documents or formats for

purchasing and maintaining purchases are
simply made depend on the nature of
purchase;
- Purchase Requisition
- Indent
- Requisition
- Job Order
- Purchase Order
- Delivery Order
- Goods Receipt Note (GRN)
- Debit Note
- Account Payable Aging
The formats work like ladder to
recording the system of accounting
support
The formats are designed to reach the desired

result and the desired to reach the balance of
quantity and cost of the item which identified
in summary of stock.
The purchase requires a procedure to
control it.
PURCHASES 10
PURCHASE REQUISITION
In case of having no store for consumable
items, the purchases for departments are
made by purchase requisition and the purchase
requisition is the document which is prepared
before purchasing of anything either on cash or
on credit. It is an internal document which is
made by the person who wants to require the
item for his department and sends it to
purchase manager. The purchase manager
submits it to chief executive officer for
approval and on approval; he arranges to buy
the items required.
The purchase requisition may contain serial
number, description, quantity and cost
approximately which is prepared by the person
who wants to require the item or items for
machinery, repair, maintenance, etc. for
department and sends it to purchase
department duly signed by the departmental
head. The Purchase requisition will be checked
by purchase department.
The purchase
department also ascertains the cost of the item
or items approximately and submits gets it
approved for purchase.
PURCHASES 11
The purchase requisition is designed below or

may be designed according to the requirement;
The Purchase requisition is an order to

purchase in cash.
PURCHASES 12
INDENT
Indent means to ask for consumable items
useable in office like printing, stationery, and
general items. It will be required in case of
having a store for these items.
The indent for issuing consumable items may
be specified below;
Indent means to ask for consumable items.

PURCHASES 13
REQUISITION
The requisition may relate to production which
requires raw materials, packing materials and
plant, machinery and building require repair
and maintenance.
The requisition may be designed as;
Requisition relates items required for production and building

use.
PURCHASES 14
JOB ORDER
Job order is a written instruction to

provide a particular goods or services
in order to perform a work according
to specified requirements, time frame,

and cost estimates.
Generally, the Job order relates to
services
business
and
for
manufacturing
business
wherein
services or goods required.
The following kinds of formats for job
order or work order may be made;
- Material issue for production
- Acquiring services from customer
- Issuing materials to engineers for outside clients;
It is also known as a work order form.

PURCHASES 15
Material issue order form;

PURCHASES 16
Job order for acquiring services from customer;

PURCHASES 17
PURCHASE ORDER:
The
purchase
order
is
an
agreement between purchaser and
seller and states that the purchaser
indents to purchase goods and
confirm the legal identity of the
purchaser.
It
also
helps
in
comparison with purchase invoice
because of having column quantity,
description, unit price and the
value of goods. The deduction of
sales tax or any other instruction is
known by purchase order.
The purchase order is placed to
buy goods on credit subject to the
delivery order.
Purchase order means the agreement of
purchase.
PURCHASES 18

PURCHASES 19
DELIVERY ORDER
order is a
document which confirms the
delivery of goods as per
purchase order. It requires the
receiving and checking of
goods by the purchaser.
The
delivery
The seller sends invoice, copy

of purchase order and delivery
challan duly checked and
received by the purchaser.
Delivery order confirms the receipt goods
ordered.
PURCHASES 20
The form or format means to cover any

transaction.
PURCHASES 21
GOODS RECEIVED NOTE (GRN)
The Goods Received Note (GRN)

indicates that the goods which were
ordered have been received by the
purchaser. On receiving the goods, the
purchaser does a signature on Goods
Received Note as a receipt of goods.
The goods received note contains
serial number, description of goods,
pack size, price, ordered quantity,
delivered quantity, and remarks.
This document is very important for
payment of invoice which confirms the
transaction.
The goods receipt note works like delivery

order.
PURCHASES 22
The form or format is made according to

requirement.
PURCHASES 23
DEBIT NOTE
If any defect in commodities is found, the purchaser
will inform the supplier for deduction of the amount
payable by debit memorandum. If the supplier
accepts the request, he will issue a credit
memorandum for the deduction of amount
receivable.
The debit memorandum reduces the liability to
vendor and credit memorandum reduces accounts
receivable to the vendor.
Debit note is issued for deduction against the

claim.
PURCHASES 24
ACCOUNT PAYABLE AGING

Account payable aging is made to pay the
amount which is payable to supplier against
purchase on credit under the agreement of
time for payment.
Account payable aging controls payments

payable.
PURCHASES 25
KIND OF STORES
There may be required many kinds of

stores in businesses dealing with materials
or goods relating to trading and producing.
The manufacturing business has wide
expansion involves in materials and
finished goods so that; it must have stores
for consumable and materials in finished
and unfinished forms when the trading
business must have Store for trading
goods.
1 - Consumable Store
- Stationery
- Machinery, Building Materials
2- Production Materials
- Materials
- Finished goods
Goods require stores.

PURCHASES 26
CONSUMABLE STORES
In case of having Store for consumable items, it
must require stores where all general items
relating to building, plant and machinery, office
equipment and others in store 1 and stationery
or office supplies in store 2 must be
maintained. It depends on the volume of
business.
The benefit of maintaining stores for
consumable is to save time and money
because of purchasing small items in need
requires person to purchase it, the person
require time and money, and time and money
can be wasted for in shape of conveyance and
purchase from retailers for tiny items and time
which can be utilized in other works. Besides
time and money, the risk of handling cash is
minimized.
In order to purchase for stores, the purchase

will be made in cash or credit from whole
sellers against cheques instead of cash.
The items are of daily use in business come under
consumable store.
PURCHASES 27
The purchase order and delivery order may be

used for consumable stores in case of
purchasing items on credit as they are mostly
used for purchasing goods for business on
credit.
STORE I
In case of maintaining store for general items
relating to plant, machinery, office equipment
and building, the procedure of keeping record
must be considered.
STORE II
The office supplies and stationery are

frequently used in business communication
and maintaining records. The store for office
supplies can be maintained which saves time,
money and risk of cash.
The stores depend on the nature of business.
PURCHASES 28
MAINTAINING OF BUSINESS STOCK

In order to maintain stock of any kind either of
consumable or of business, a device is required
to
Stock register
The stock register
- Consumable items
- Business stock
1-Trading
2-Manufacturing
3-Services
CONSUMABLE ITEMS
The stock register which contains pages of

every item could work like ledger is required to
control consumable items store one and store
two which I have designed below. The format is
designed to reach the desired result and the
desired for them is a balance of quantity and
cost of the item which identified in summary of
stock.
The business stock must have store and
recording.
PURCHASES 29
The designing of format is to focus the

transaction.
PURCHASES 30
PURCHASES 31
The stock register controls stock received and

issued.
PURCHASES 32
The summary of stock register facilitates in

making cost of goods sold statement.
The result of stock is a summary of stock.

PURCHASES 33
WRITERS VIEW
The purchase involves transactions and
transaction is made through payment on cash
on the spot or on later. As soon as the purchase
occurs, the accounting cycle starts. The
purchase relates to the cost of goods which is
made after passing through many processes of
purchasing. The profit or loss is generated by
sale and purchase and purchase is the part of
profit and loss. In the services business, the
purchase is the service of a person acquired for
completing the job just like employees,
repairers etc.
The
stock
purchasing.
maintaining
is
because
of
Then we can say the purchase pays an

important role in accounting because of which
no concept of sale is created and the stock
maintaining is because of purchasing.
WRITTEN BY:
SYED AQEEL RAZA

MASTER OF COMMERCE & POLITICS

Accounting For Purchases

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Accounting For Purchases

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THE SYSTEM OF

SYED AQEEL RAZA

ACCOUNTING FOR PURCHASES

Purchase plays an important role in accounting.

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL

The purchase is debited to purchase account

1-PURCHASE FOR PERSONAL

which is a current asset and asset is decreasing

No purchase is allowed in business for personal

PURCHASES FOR BUSINESS:

Merchandise for trading

Merchandise for Trading

Materials for manufacturing

The manufacturing business deals with materials

The purchase is made for sale against profit.

Assets for business

Work against services

PURCHASES FOR EXPENSES

The purchase is debited to purchase account

The credit purchase is the liability of purchaser

Account payable (Debit)/Liability

The result of purchase is to increase in

THE PROCEDURE OF PURCHASING AND

The following documents or formats for

The formats are designed to reach the desired

The purchase requisition is designed below or

The Purchase requisition is an order to

Indent means to ask for consumable items.

Requisition relates items required for production and building

Job order is a written instruction to

to specified requirements, time frame,

- Issuing materials to engineers for outside clients;

It is also known as a work order form.

Material issue order form;

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL

Job order for acquiring services from customer;

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL

The seller sends invoice, copy

The form or format means to cover any

GOODS RECEIVED NOTE (GRN)

The Goods Received Note (GRN)

The goods receipt note works like delivery

The form or format is made according to

Debit note is issued for deduction against the

ACCOUNT PAYABLE AGING

Account payable aging controls payments

There may be required many kinds of

Goods require stores.

In order to purchase for stores, the purchase

The purchase order and delivery order may be

The office supplies and stationery are

MAINTAINING OF BUSINESS STOCK

The stock register which contains pages of

The designing of format is to focus the

The stock register controls stock received and

The summary of stock register facilitates in

The result of stock is a summary of stock.

Then we can say the purchase pays an

SYED AQEEL RAZA

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