Accounting for purchases

The accounting for purchase is the part of my book:the system of accounting" vol III

1. THE SYSTEM OF ACCOUNTING






Volume III





WRITTEN BY:
SYED AQEEL RAZA
MASTER OF COMMERCE & POLITICS

2. 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<[email protected]>

3. 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 three kinds of purchasing in
accounting;
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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

4. 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 owner’s 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.

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

5. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

6. 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.

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

7. 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.

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

8. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>


PURCHASES 8

9. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

10. 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 support recording the
system of accounting

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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

11. 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.


<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

12. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

13. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

14. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

15. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

16. PURCHASES 15

Material issue order form;



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17. PURCHASES 16
Job order for acquiring services from customer;




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18. 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.

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

19. PURCHASES 18




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20. PURCHASES 19
DELIVERY ORDER
The delivery 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 seller sends invoice, copy of
purchase order and delivery challan
duly checked and received by the
purchaser.



Delivery order confirms the receipt goods ordered.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

21. PURCHASES 20



The form or format means to cover any transaction.
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22. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

23. PURCHASES 22



The form or format is made according to requirement.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

24. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

25. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

26. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

27. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

28. 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.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

29. 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.
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30. PURCHASES 29



The designing of format is to focus the transaction.
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31. PURCHASES 30


PURCHASES 31

The stock register controls stock received and issued.
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32. PURCHASES 32

The summary of stock register facilitates in making cost of
goods sold statement.



The result of stock is a summary of stock.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<[email protected]>

33. PURCHASES 33


WRITER’S 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 maintaining is because of purchasing.
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