You bought something for your own business and now you know you should account for it. You\u2019re 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.<\/p>\n
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\u2019s more to it. Yes, we also pay via bank transfers, but that\u2019s not what I\u2019m on about. <\/p>\n
Accounting wise, what you ought to do when making a purchase is the following:<\/p>\n
(1) Debit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (2) Expense account \/ (3) Inventory<\/p>\n
(4) Credit\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (5) Cash \/ (6) Payable to suppliers<\/p>\n
Let me explain now what this accounting entry is about.<\/p>\n
(1)\u00a0\u00a0\u00a0\u00a0\u00a0 Accounting entries normally start with debits<\/strong> to keep them similarly structured. So in case you\u2019ve bought something, your debit entry can be two things \u2013 either you\u2019ve 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\u2019s inventory on your accounts and not expense (increasing assets). Remember, increasing your assets and expense entries are always on the debit side<\/strong>.<\/p>\n (2)\u00a0\u00a0\u00a0\u00a0 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<\/strong> and you should account this sum on the appropriate income statement account<\/strong>. Always make sure the account you\u2019re charging the expense is correct and that you\u2019re not putting office supplies for an example on the rent expense account.<\/p>\n (3)\u00a0\u00a0\u00a0\u00a0 Now, as we mentioned, if you bought something you plan to either use in the production or sell sometime later, it\u2019s inventory on your balance sheet<\/strong> and should be accounted for accordingly. It\u2019s 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.<\/p>\n (4)\u00a0\u00a0\u00a0\u00a0 As accounting is always two-sided, there\u2019s also the credit side of it. Note here, that with credits you decrease assets and increase liabilities<\/strong>. In case you\u2019ve bought something you\u2019re normally expected to do one of the two things \u2013 either pay for it right away with case (decreasing assets) or pay later on which means you\u2019re taking up a liability (increasing liabilities). Makes sense, doesn\u2019t it?<\/p>\n (5)\u00a0\u00a0\u00a0\u00a0 One means to settle with your suppliers is to pay cash right at the spot<\/strong>. This means you take some of your funds \u2013 either you already have cash or you have to go to the bank, either way you\u2019re decreasing your most liquid asset. So as you\u2019re either putting sum paid into your expenses or inventory, you also should show how you\u2019re paying for it.<\/p>\n (6)\u00a0\u00a0\u00a0\u00a0 Another means for paying to your suppliers is as we said via bank transfer<\/strong>. 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\u2019s on the invoice), you should show this as a payable to your supplier \u2013 you should show that you\u2019ve got a liability you need to settle in due time. Paying the invoice is on it\u2019s 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.<\/p>\n 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.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" You bought something for your own business and now you know you should account for it. You\u2019re 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,35],"tags":[],"class_list":["post-3471","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-7-basic-entries"],"aioseo_notices":[],"_links":{"self":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3471","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=3471"}],"version-history":[{"count":3,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3471\/revisions"}],"predecessor-version":[{"id":3474,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/3471\/revisions\/3474"}],"wp:attachment":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=3471"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=3471"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=3471"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}