In one of my series of articles, I explained how to use MS Excel to post Sales transactions. In this article, I will examine how you can use Google Sheets for purchases transactions. To begin, let’s define and classify the types of these transactions.
Meaning of Purchases
Purchases are the buying of goods for resale in normal business activities. Yes, when a business owner or staff buys items and the purpose of it is to sell them during the normal course of business, then it is called purchases. However, when items are bought without the intention of selling them or were sold but the item is not part of what the business trades as its normal business activities, then, it isn’t purchased.
For example, if a firm sells furniture daily, the furniture is its normal business activity. Therefore, anytime it buys furniture for resale, it is called purchases. However, if the business owner bought a car, this isn’t a purchase. If the owner decides to sell the car, later on, it is still not it. Also, if the business bought furniture and the intention was to use it in the office, you cannot refer to it as a purchase.
Types of Purchases Transactions
There are two types of these transactions. Cash and credit transaction. Cash purchases are when goods are bought and payment is made immediately. For example, a business owner buys furniture from a supplier and pays for it immediately. Credit purchases arise when payment is deferred to a later date. Assuming the business owner promises the supplier that he will make payment the following day. This is a credit transaction.
How to record/post Cash Purchases Transactions
It is simple to apply the double-entry principle to cash transactions. You need to post one entry to the cash book and a second entry to the purchases account. Also, you need to ensure that a source document is attached. That’s the cash receipt.
The double entry principle is applied to post these accounts. The principle states: “Debit is the receiver of value and Credit is the giver of value.” If you think logically, you will see that the cash account is the giver of value. Why? You will pay cash to receive the goods purchased. Therefore;
Dr: Purchases Account (receiver of value)
Cr: Cash Account (giver of value)
How to record/post Credit Purchases Transactions
When goods are bought on credit, payment is deferred to a later date. When the goods are bought, the two accounts involved are account payables and purchases. And the source document is an invoice. When the payment is made the two a/c are cash book and account payables. And the source document is a receipt.
When Goods are Bought
The debit side of an account is the receiver of value and the credit side giver of value is applied. The giver is the supplier. Therefore, the supplier becomes a creditor or an account payable as it is recently known. And the Purchases account will receive the goods. Therefore;
Dr: Purchases a/c (receiver of value)
Cr: Supplier/Account payables (giver of value)
When the Supplier is paid
The supplier can be paid in cash or through the bank (either by transfer or cheque). The supplier will receive the payment. While the cash/bank will make (give)the payment. Therefore;
Dr: Supplier/Account Payables (receiver of value)
Cr: Cash/Bank Account (giver of value)
Examples and Solution of Purchase Transaction of Google Sheet
Let us assume two scenarios.
Bola is a merchant and purchases goods on a cash basis only. On the 27th of June, she purchased goods from Micheal N259,000. The double entry, from Bola books of accounts, shall be
Dr: Purchases a/c with N259,000 and
Cr: Cash A/c with the same amount.
The screenshot below shows the entry on Google Sheet.
Efe purchases goods on credit terms from Olamide for the sum of N1,250,000 on July 3rd. On the 8th of August, she paid the amount by bank transfer. The double entries are divided into two parts
When the goods were bought
Dr: Purchases A/c with N1,250,000
Cr: Olamide/Account Payables with the same amount
When the bank transfer was done by Efe
Dr: Olamide/Account Payables
Cr: Bank account with the sum of N1,250,000.
The screenshot is below.
As you have learned, goods bought for resale in normal business activities are referred to as purchases. There can be cash or credit transactions here. This transaction must pass through a source document before they are posted to the individual accounts by applying double-entry principles.