Applying The Rule of Debit and Credit- Example 4

Example-4.  Purchased goods worth £5000 for cash

Step 1- Identify the two accounts involved in this transaction

1.   Asset Account (Goods are assets)

2.   Asset Account (Cash 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 and not for permanent use in the business 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 (Assets- Goods and cash)

     Purchase of Goods made the asset increase by £5000

Cash is decreased by £5000 by the payment for goods

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 asset account (cash) decreases it is to be credited

So, entry is:

Debit Purchases Account with £5000

Credit Cash Account with £5000