You bought something for your own business and now you know you should account for it. You’re not running a shop in some small village like 100 years ago where you could just get cash from the till, go buy something and be done with it. No.

The way we do things is quite the opposite. I mean we still take money if we are going to pay by cash, but there’s more to it. Yes, we also pay via bank transfers, but that’s not what I’m on about.

Accounting wise, what you ought to do when making a purchase is the following:

(1) Debit                                (2) Expense account / (3) Inventory

(4) Credit                              (5) Cash / (6) Payable to suppliers

Let me explain now what this accounting entry is about.

(1)      Accounting entries normally start with debits to keep them similarly structured. So in case you’ve bought something, your debit entry can be two things – either you’ve made an expense as in you bought something to be used right away (expense) or just as an office supply to be used at a random time and either way, not to be sold. However, in case you bought something to be sold at a later date, it’s inventory on your accounts and not expense (increasing assets). Remember, increasing your assets and expense entries are always on the debit side.

(2)     In case you bought office supplies, services or fuel for the car for an example, and not something to be sold later on, you made an expense and you should account this sum on the appropriate income statement account. Always make sure the account you’re charging the expense is correct and that you’re not putting office supplies for an example on the rent expense account.

(3)     Now, as we mentioned, if you bought something you plan to either use in the production or sell sometime later, it’s inventory on your balance sheet and should be accounted for accordingly. It’s not put into expense right away but at the time you use it in the production or make the sale, i.e. sell the item. So with your debit entry you may also just increase your inventory.

(4)     As accounting is always two-sided, there’s also the credit side of it. Note here, that with credits you decrease assets and increase liabilities. In case you’ve bought something you’re normally expected to do one of the two things – either pay for it right away with case (decreasing assets) or pay later on which means you’re taking up a liability (increasing liabilities). Makes sense, doesn’t it?

(5)     One means to settle with your suppliers is to pay cash right at the spot. This means you take some of your funds – either you already have cash or you have to go to the bank, either way you’re decreasing your most liquid asset. So as you’re either putting sum paid into your expenses or inventory, you also should show how you’re paying for it.

(6)     Another means for paying to your suppliers is as we said via bank transfer. Now as this normally is something that takes time and is to be done at the date when the payment is expected to be done (the payment date set by the supplier that’s on the invoice), you should show this as a payable to your supplier – you should show that you’ve got a liability you need to settle in due time. Paying the invoice is on it’s own another entry, but generally speaking, when making a purchase, you either pay cash right away or take on a liability to pay later on.

And this is how you account for your purchases. You charge it either into expenses or put into inventory and also on the other side make an entry for the payable or show that you paid right away.