- (1) Purchases
- Vendor
If the purchase is a cash purchase, the liability to the vendor is immediately canceled by the entry:
- (2) Vendor
- Cash
The vendor’s account is canceled by being credited and then immediately debited with the same amount. This leaves on the books as the net result of these two entries a debit to Purchases and a credit to Cash. This record of the transaction is seen therefore to agree with the analysis of the cash purchase transaction as previously explained.
Instead of opening individual accounts with each vendor, in the case of cash purchases, the same result is sometimes accomplished by the use of one account called “Sundry Cash Creditors.” To it all such cash purchase transactions are posted both from purchase journal and cash book. This method records the combined liability to all vendors in one account. It does not, however, show the volume of business done with each creditor.
If the purchase is on a note, the liability to the vendor as set up in entry (1) is immediately canceled by the entry:
- (3) Vendor
- Notes Payable
The net result of these entries, (1) and (3), is seen to be a debit to Purchases and a credit to Notes Payable—a record which corresponds with the original analysis of the transaction.
Since a purchase on open account also results in a debit to Purchases and a credit to Vendor, it is seen that all types of purchase transactions may be recorded as a debit to Purchases and a credit to Vendor. Accordingly, in making the current record in the purchase journal, the debit element may be omitted, since it is always the same, and only the credit element, which differs in each case, may be set up. Periodically, usually at the close of each month, the debit element is formally set up for the total amount of purchases for the period. (See [Form 7], a typical purchase journal.) Thus the one formal debit is made to offset the numerous credits set up during the month. The purchase journal is thus seen to be as fully a debit and credit journal as the general journal, even though in making its day-to-day record the debit element is, for the sake of economy in labor, omitted.
Other methods of handling the cash and note purchase transaction are explained on [page 152].