Applying the rule of debit and credit - Example 5

Example-5.  Purchased goods worth £5000 from Jammy Traders on credit

Step 1- Identify the two accounts involved in this transaction

1.   Asset Account (Goods are assets)

2.  Liabilities Account (here the liability accounts is Jammy Traders. As the purchase is on credit, business is having liability to pay £5000 in future to Traders Account)

      Goods are items which are purchased by a business for using as a raw material in the manufacturing process or to sell at a higher price. It includes raw material work in progress and finished goods.

      When goods are purchased we debit “Purchases Account” not “Goods Account”.

      When goods are sold we credit “Sales Account” not “Goods Account”.

Step 2- Understand the nature of the impact of the transaction on the two accounts (asset and liability)

     Purchase of Goods made the asset increase by £5000                      

     Liability of Business is increased by £5000 as a result of the purchase on credit.

Step 3- Decide which account is to be debited and which is to be credited.

            We know that;

When asset account (Goods-termed as Purchases) increases it is to be Debited and,

When liability account (Jammy Traders) increases it is to be credited

So, entry is:

Debit Purchases Account with £5000

Credit Jammy Traders Account with £5000