When a business purchases goods or services from a supplier it may do so either:
To obtain goods or services on credit, an individual or business must apply to open a "Credit Account" with the supplier. Usually, there are strict procedures to follow when requesting to open a credit account. These procedures serve to limit the financial risk for the supplier i.e. rogue customers who take goods or services on credit and then fail to pay. The procedures involved with a credit account application involve checking the applicant businesses' standing in the business community. The applicant will need to provide two or three business referees who will vouch that the applicant is trustworthy and pays the account at the required time.
When a business makes a purchase on credit it will receive a "Tax Invoice" from the supplier (Figure 1 is an example).
Figure 1: Suppliers Tax Invoice
Details of the Tax Invoice must be recorded in the Purchases Journal (see Figure 2 below).
The Purchases Journal is one of the "books of account" but since the advent of computers, the purchases journal is usually electronically kept as part of the financial accounting database. Details to be written into the purchases include:
The traditional Purchases Journal is divided into columns to enable ease of analysis and totalling. Some column headings such as Invoice Total and GST will remain constant but other columns headings can be defined as required.
The process of using columns to find totals (of similar expenses) is often referred to as "Dissection". Columns can be created as required.
The dissection is the same process that is followed in other journals such as Cash Payments Journal. At the end of the month all columns are added and posted to the respective General Ledger Accounts.
Figure 2: Purchases Journal
|Date||Supplier||Ref No||Invoice Total||GST||Promotion||Motoring Expenses||Camping Supplies|
|17/01/12||Qld Camping Supplies||A57||165.00||15.00||150.00|
|23/01/12||Qld Camping Supplies||A72||33.00||3.00|
In the above example Purchases Journal, the invoice from the supplier 4WD Vehicles Pty. Ltd. has been entered into the Purchases Journal. The total of the invoice ($1100) has been entered into the "Invoice Total" column, the Goods and Services Tax (GST) of $100 has been entered into the GST column, and because the supply from 4WD Vehicles is for vehicle servicing, the expense has been dissected into the "Motoring Expenses" column.
All transactions listed in the Purchases Journal are purchases on credit. Effectively, for each item purchased, a debt has been created that must be repaid at some future time. The business now owes money to 4WD Vehicles Pty. Ltd. Persons to whom the business owes money are called Creditors, and therefore 4WD Vehicles Pty Ltd is a Creditor.
In the General Ledger there will be an account which keeps track of the total amount owing to all creditors. This account may be called "Accounts Payable" or "Trade Creditors" or just "Creditors". These different names mean the same thing, so do not be confused.
It is necessary to know not only the total debt to all Trade Creditors but also the debt to each individual creditor. In order to know exactly what our debt is to each creditor the correct practise is to keep a Creditors Ledger. The Creditors Ledger is a ledger that is subsidiary to the General Ledger.
In the Creditors Ledger there will be an account 4WD Vehicles Pty Ltd which tracks all the invoices received and all the payments made, and provides information on how much is owed to this particular Creditor.