Debit and Credit Ledger selection on Credit Purchase of Trading Goods

Journal Entry on Credit Purchase of Trading Goods when Indirect Tax like GST/VAT etc. is charged and you are eligible to claim ITC(Input Tax Credit).

Meaning of Credit Purchase: 

Credit Purchase means goods purchased/received from the supplier or vendor,but immediate payment is not made against that goods by Cash/Bank. Payment is made after the date of goods purchased/received.

Debit and Credit Ledger selection on Credit Purchase of Trading Goods
Detail Explanation with Example. 

Let's take an example for better understanding.

In the Books of Mr.Sanjay Gupta the following transaction occurred.

Goods purchased from Krishna Enterprises, Odisha as per Invoice No-925 for ₹2,31,438/- including GST 18% on dated 02/04/2020

Steps and Procedures for Decision making for Debiting and Crediting of Ledger Accounts of the above transaction

Step - 1

In first step,we have to identify the Ledger Accounts involved in the above transaction.

As a result,we found three Ledger Accounts.

1) Purchase A/c

2) GST A/c(IGST/CGST and SGST are used as per applicability of GST Act.)

3) Krishna Enterprises A/c (Sundry Creditor)

Debit and Credit Ledger selection on Credit Purchase of Trading Goods

Step - 2

In second step,we have to find out the type of Ledger Accounts involved by using either one of the Accounting Approach.

The above three Ledger Accounts mentioned in step-1 are related to type

Nominal Account(Purchase A/c),Personal Account(GST A/c) and Personal Account(Krishna Enterprises A/c) in Traditional Approach.

Asset Account(Purchase A/c),Asset Account(GST A/c) and Liability Account(Krishna Enterprises A/c) in Modern Approach.

Type of Ledger Accounts involved on Credit Purchase of Trading Goods

Note: In Traditional Approach GST A/c is under type Personal Account (because GST A/c stands on behalf of Govt. Account)

Step - 3

In third step,we have to look at the nature or flow of the Ledger Accounts involved by using either one of the Accounting Approach.

Purchase A/c - Expense,GST A/c - Receiver and Krishna Enterprises A/c - Giver for the business in Traditional Approach.

Purchase A/c(Asset Account) increases,GST A/c(Asset Account) increases and Krishna Enterprises A/c(Liability Account) increases in Modern Approach.

Flow of Ledger Accounts on Credit Purchase of Trading Goods

Step - 4

In fourth and final step,now it is time to place the Ledger Accounts in their respective column, i.e Debit Column or Credit Column by applying the Debit and Credit Rule using either one of the Accounting Approach.

Debit and Credit Rule
As a result,Purchase A/c shows a Debit effect for ₹1,96,133.90

GST A/c shows a Debit effect for ₹35,304.10 and

Krishna Enterprises A/c shows a Credit effect for ₹2,31,438.00

Credit Purchase of Trading Goods - Purchase A/c(Dr.),Indirect Tax A/c(Dr.) and Creditor A/c(Cr.)
Note : In the above transaction,total Invoice Value including GST 18% is  ₹2,31,438.00

Purchase Value of Goods={₹2,31,438/(100+18)} x 100 

or Taxable Value of Goods=(₹2,31,438/118) x 100=₹1,96,133.90

GST 18% on Purchase Value of Goods  =  ₹35,304.10

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Location: Bhubaneswar, Odisha, India

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