If as a business, you buy goods or services on credit from a supplier (accounts payable) then the supplier will supply the goods and business will incur a liability to the supplier for that amount, but no cash will change hands at that stage. Suppose for example, the business buys goods on credit for the amount of 4,000, then the journal entries will be as follows.
Buy Goods on Credit from a Supplier – Journal entries
The accounting records will show the following bookkeeping entries when you buy goods on credit from a supplier:
Buy Goods on Credit Bookkeeping Entries Explained
Debit – What came into the business
The goods came into the business and will be held as part of inventory until sold.
Credit – What went out of the business
The liability to the supplier is increased by the value of the goods purchased.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
|Purchases of Goods||=||Liability to Supplier||+||None|
In this case both the assets and the liabilities are increased by the same amount when you buy goods on credit.
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