Credit purchase

What it means

A purchase of goods on which payment is deferred, creating a trade payable until the supplier is paid.

Example

Buying RM2,000 of stock on credit creates a RM2,000 trade payable.

Why it matters

Credit purchases build the purchases ledger and the amounts owed to suppliers.

In practice

A credit purchase is recorded by debiting the purchases account and crediting the supplier's account in the purchases ledger. The bank is untouched until payment is made later. It creates a trade payable, which is a current liability in the statement of financial position. The purchases figure feeds the cost of sales in the income statement.

Buy goods for RM3,000 on credit. Purchases rise by RM3,000 and a RM3,000 payable is owed to the supplier. Paying the supplier later means debiting their account and crediting bank, which clears the liability.

The contrast is a cash purchase, where the bank or cash account is credited at once and no payable arises. It also helps to separate a credit purchase from a credit sale. A purchase is goods coming in and produces a payable you owe. A sale is goods going out and produces a receivable owed to you.

If supplier accounts and payables give you trouble, one of our teachers can take you through the entries one step at a time. Book a trial class.

Related terms

• Trade payable
• Purchases day book
• Purchases

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.