Key Concepts
When a business buys on credit, the supplier delivers the goods, service, or non-current asset together with an invoice (the bill stating what is owed and by when). The double entry depends on what the business is recording:
| Event | Debit | Credit |
|---|---|---|
| Credit purchase of goods | Inventory (+asset) | Trade payables — [Supplier] (+liability) |
| Credit purchase of a non-current asset | [Non-current asset, e.g. Office equipment] (+asset) | Trade payables — [Supplier] (+liability) |
| Credit purchase of a service | [Relevant expense] (+expense) | Trade payables — [Supplier] (+liability) |
| Return of goods to the supplier | Trade payables — [Supplier] (−liability) | Inventory (−asset) |
| Payment to the supplier | Trade payables — [Supplier] (−liability) | Cash at bank / Cash in hand (−asset) |
| Cash discount received on early payment | Trade payables — [Supplier] (−liability) | Discount received (+income) |
A few points to note:
- Goods bought for resale are recorded straight into Inventory — not into any separate goods account.
- Returning goods to the supplier reduces what is owed and removes the goods from inventory: Dr Trade payables / Cr Inventory.
- The cost of bringing goods in is part of the cost of inventory — what it costs to get the goods to the business and ready to sell. So you Dr Inventory for it and Cr Trade payables (or Cash). Do not confuse this with the cost of delivering goods out to customers — that is a selling expense, not part of inventory cost. For a non-current asset, add the delivery and installation costs to the cost of the asset instead; both follow the same idea: include whatever it costs to get the item ready for use.
Trade payable vs expense payable — don't confuse the two.Record a credit purchase of a service as Trade payables — [Supplier]. The supplier has done the work and sent an invoice, so you know exactly who is owed and how much. A service is used up as soon as it is provided, so it is recorded as an expense, not an asset you still hold.
An expense payable is different. It is a year-end adjustment for an expense the business has already used but has not yet been billed for — no invoice has arrived, so it is not tied to a named supplier.
The trade payable increases when you buy, decreases when you pay, return, or take a cash discount. Buying on credit increases (credits) Trade payables; everything that settles or reduces the debt (cash paid, goods returned, discount received) decreases (debits) it.
The following transactions took place in August 20X8:
- 3 Aug — Bought goods from Hui Lin, list price $9,000.
- 7 Aug — Returned goods to Hui Lin, list price $1,000.
- 10 Aug — Paid the amount owing on 1 August by cheque, within the discount period.
- 3 Aug purchase: $9,000 − 10% trade discount = $8,100.
- 7 Aug return: $1,000 − 10% trade discount = $900.
- 10 Aug payment: the $2,400 owed on 1 August is paid within 10 days, so a 5% cash discount applies: 5% × $2,400 = $120. Saffron Trading pays $2,400 − $120 = $2,280 by cheque.
Note: only the $2,400 owed from 1 August is paid here — the 3 Aug purchase and 7 Aug return are still outstanding, so this account will not close to zero.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X8 | |||
| 3 Aug | Inventory | 8,100 | |
| Trade payables — Hui Lin | 8,100 | ||
| 7 Aug | Trade payables — Hui Lin | 900 | |
| Inventory | 900 | ||
| 10 Aug | Trade payables — Hui Lin | 2,280 | |
| Cash at bank | 2,280 | ||
| 10 Aug | Trade payables — Hui Lin | 120 | |
| Discount received | 120 |
Profit for the period increases by $120 (the discount received is an income), and trade payables decrease by $120 (it settles part of the debt).
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X8 | ||||
| 1 Aug | Balance b/d | 2,400 Cr | ||
| 3 Aug | Inventory | 8,100 | 10,500 Cr | |
| 7 Aug | Inventory | 900 | 9,600 Cr | |
| 10 Aug | Cash at bank | 2,280 | 7,320 Cr | |
| 10 Aug | Discount received | 120 | 7,200 Cr | |
| 1 Sep | Balance b/d | 7,200 Cr |
Where these figures appear in the financial statements.
The $120 discount received is an income, so it appears under Add: Other income (the section for income other than sales) in the Statement of Financial Performance. The $7,200 closing balance is a current liability, so it appears as Trade payables under current liabilities in the Statement of Financial Position.
The delivery and installation are part of getting the asset ready for use, so they are added to the cost of the non-current asset: $4,000 + $200 = $4,200.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X8 | |||
| 4 Sep | Office equipment | 4,200 | |
| Trade payables — Pei Shan | 4,200 |
(The equipment is not bought for resale, so it is debited to the non-current asset account — Office equipment — not to Inventory. For goods bought to resell, the cost of bringing the goods in would be added to Inventory instead.)
Forgetting to apply the trade discount to a return. A return to the supplier is valued at the same trade discount rate as the original purchase — e.g. goods with a $1,000 list price bought at a 10% trade discount are returned at $1,000 − 10% = $900, not $1,000.
Crediting "Sales returns" or "Inventory returns" for a return to the supplier. There is no separate returns account under this syllabus — a return of goods to the supplier is credited directly to Inventory, reducing what the business holds for resale.
Recording a credit purchase of a non-current asset as Inventory. A non-current asset is not bought for resale — debit the asset account (e.g. Office equipment), not Inventory.
Crediting Cash at bank for a credit purchase. On a credit purchase, no cash leaves the business yet — credit Trade payables, not Cash at bank.
Recording discount received on the wrong side. Discount received is an income — it is credited (Dr Trade payables / Cr Discount received).