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Credit sales and purchases.

  • 5 posts
  • # 54537

Hi, I am new to ICB and would be pleased if someone could explain the rules for credit purchases and sales.I would like to get a grasp of this before I move on to the next chapter. Thanks stewart.

  • Practice Licence
  • 698 posts
  • # 54541

Hi Stewie

What exactely is you you dont grasp this is a very wide subject to advise on as essentially you need to grasp the entire double entry concept.

cheers
Stuart

  • Fellow PM.Dip
  • Practice Licence
  • 115 posts
  • # 54547

Hi Stewart

As Stuart says it's a huge subject. But if what you mean by the 'rules for credit purchases/sales' are the terms, then these are agreed between the supplier and purchaser. Standard practise is 30 days, so 30 days after the date on the invoice the purchaser must pay for the goods or services.

But it can be anything, the supplier could insist on payment before the goods/services are delivered or if it is a costly and complicated item there could be a series of payments. The point is the supplier and purchaser agree on what the terms are in advance.

cheers Mike

  • 5 posts
  • # 54549

Thanks Stuart. I am now trying to grasp double entry via DEADCLIC method and with the help of my distance learning tutors from Kaplan.It does state in the Practical bookkeeping study text I am learning from that this can be a tricky subject. What i dont understand is why creditor is a debit in a puchases account? Thanks again Stewart. I hope I am making some sense.

  • Practice Licence
  • 698 posts
  • # 54556

Hi Stewart

it all goes back to the accounting equation.

                                               Assets = Liabilites + Capital


the rule with double entry is that every entry should have two equal and opposite in order to balance.


  Increase Deacrease
Assets Debit Credit
Liabilites Credit
Debit
Sales Credit Debit
Purchases Debit Credit


Looking at this table when you posting a invoice on the purchase ledger you are creating a liability in the creditors account therefore to increase the liability you have to Credit the credtiors account and the corresponding entry therefore must be a debit to the relevant nominal cost account.

If you were buying and paying for the goods straight away you would want to reduce the asset of bank hence credit bank and therefore would have to debit the relevant cost account.

Hopefully this is of some help

Best regards
Stuart


                                              

  • 25 posts
  • # 54563

Hi,

The reason why the creditors name is on the debit side of the purchases account is because you are writing the account for the corresponding double entry. So when you look at the purchases account you know which account to find the other entry in.

My course with ideal schools says that you think of the debit entry being the account that is receiving the value, and the credit entry being the account that is giving the value, whether that value be goods or cash. Does that make sense? It helped me to grasp the concept.

Hope that helpsSmile

Nikki

Edited at 17 Feb 2011 08:51 PM GMT

  • 5 posts
  • # 54569

Thanks for that helpful information Nikki. I think ive got enough to go on now. Stewart.

  • 5 posts
  • # 54570

Thanks Stuart. Its starting to make sense. Stewart.

  • 5 posts
  • # 54571

Cheers Mikefor that useful piece of information.Stewart.

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