Purchases and purchase returns day books - Posting to payabl...

Learning Outcomes

After reading this article, you will be able to explain the role and recording of purchases and purchase returns in the day books, and demonstrate how to post these transactions to both the payables ledger and control account. You will also understand how to deal with supplier credit notes and recognise the controls in place for error detection and reconciliation in payables accounting.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how purchases and purchase returns are initiated, documented, and recorded. This topic is key for gaining proficiency in supplier records and accurate financial reporting. Your revision should focus on:

• The purpose and function of purchases and purchase returns day books
• Recording credit purchases and purchase returns in the respective day books
• Posting totals to individual supplier accounts in the payables ledger
• Transferring summary totals to the payables control account in the general ledger
• The use of credit notes as documentation for purchase returns
• Reconciling supplier balances and identifying errors in postings

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which document is used to record goods returned to a supplier?
   1. Invoice
   2. Credit note
   3. Statement of account
   4. Delivery note
2. If a business buys goods on credit from several suppliers, how are these transactions initially recorded?
   1. Direct to the general ledger
   2. Individually in the purchases day book
   3. Individually in the payables ledger
   4. As a total in the purchases account

3. True or false? The total from the purchases day book is posted to the debit of purchases and the credit of payables control account.

4. Briefly state what information is required on a purchase returns day book entry.

Introduction

The regular purchase of goods and services on credit is essential in business operations. Every stage, from ordering to eventual payment or return, must be carefully documented and recorded. Purchases and purchase returns day books serve as the primary record for supplier invoices and credit notes. The accuracy of these day books is critical, as their totals feed systematically into the payables ledger, individual supplier records, and the payables control account in the general ledger. Efficient posting from these books ensures that a business always knows how much it owes and helps maintain tight financial control.

Key Term: Purchases Day Book
A book of prime entry used to record all credit purchases of goods and services before they are entered into the ledger accounts.

Key Term: Purchase Returns Day Book
A book of prime entry used to record goods returned to suppliers and supplier credit notes received.

Key Term: Payables Ledger
A subsidiary ledger containing individual accounts for each supplier to whom the business owes money.

Key Term: Payables Control Account
A general ledger account summarising the total amount owed to all suppliers.

RECORDING CREDIT PURCHASES

Most businesses purchase supplies and inventory on credit. Each supplier sends an invoice for goods delivered, and these are first recorded in the purchases day book. This process is separate from instant purchases made with cash.

Entering Purchases in the Day Book

Invoices received from suppliers are listed in the purchases day book, noting the date, supplier name, details, and the total amount (often net of any trade discount but gross of sales tax if not recoverable). Each entry represents an obligation to pay in future.

Key Term: Invoice
A document from a supplier requesting payment for goods or services supplied on credit.

Posting to Payables Ledger and Control

At a regular interval (often monthly), the total value of credit purchases is posted from the purchases day book in two ways:

• Each supplier's individual account in the payables ledger is credited with the value of their specific invoices, and
• The total of the purchases day book is posted as a credit to the payables control account in the general ledger and as a debit to the purchases account.

This system allows both summary (control) and detailed (individual supplier) tracking.

Worked Example 1.1

A business records the following invoices in its purchases day book during April:

At month-end, what postings are made to the ledgers?

Answer:

• Alpha Ltd: credit £2,000 to their account in the payables ledger
• Beta Corp: credit £1,150 to their account
• Sigma Plc: credit £850 to their account
• Total (£4,000) is credited to the payables control account and debited to the purchases account in the general ledger.

RECORDING PURCHASE RETURNS (RETURN OUTWARDS)

Sometimes, goods are returned to suppliers due to being faulty, damaged, or sent in error. Suppliers usually issue a credit note as evidence of the return.

Returns are first entered into the purchase returns day book (also called returns outwards book), recording the date, supplier, and value (as shown on the credit note).

Key Term: Credit Note
A document issued by a supplier to indicate a reduction in the amount owed due to goods returned or an error on an invoice.

Posting Purchase Returns

At set intervals, totals from the purchase returns day book are posted as follows:

• Debit individual supplier accounts in the payables ledger with the value of the return,
• Debit the total to the payables control account in the general ledger,
• Credit the total to the purchase returns account.

This reduces the balances outstanding to suppliers.

Worked Example 1.2

During May, credit notes are received as follows:

How are these posted to the ledgers?

Answer:

• Alpha Ltd: debit £300 to their account in the payables ledger
• Sigma Plc: debit £100 to their account
• Total (£400) is debited to the payables control account and credited to the purchase returns account in the general ledger.

POSTING SUMMARY TOTALS AND CONTROLS

This systematic posting allows for accurate and efficient management of payables. The payables control account acts as a check and reconciliation tool, the total balance in the payables ledger should always match the control account (subject to any unposted amounts, errors, or timing differences).

Reconciliation processes help identify data entry mistakes, unrecorded credit notes or payments, and other discrepancies early.

Key Term: Reconciliation
The process of comparing records from different sources to ensure they agree and errors are detected.

ERRORS AND RECONCILIATION

Mistakes can occur in transferring data from the day books to ledgers or in the supplier statements. Regularly reconciling the control account with the total of supplier accounts and supplier statements ensures errors are identified quickly so they can be corrected.

Worked Example 1.3

At month-end, the payables control account shows a balance of £18,700, but the total of individual supplier balances is £18,400. What are the possible causes?

Answer:
The difference may be due to a purchase invoice or credit note recorded in the control account but not yet in a supplier's account, an entry posted to the wrong account, or an arithmetic error. Investigation and reconciliation are required.

Exam Warning

Always ensure that debit entries reflect returns or payments to suppliers, and credit entries reflect new purchase obligations. Posting in the wrong direction is a common error that leads to inaccurate balances.

Revision Tip

Reconcile the payables control account to the total of supplier accounts before finalising financial statements—this catches errors and omissions early.

Summary

Purchases and purchase returns day books serve as the primary record for credit supplier transactions. Correct totals must be posted to both the individual payables ledger accounts and the payables control account in the general ledger. Regular reconciliation ensures data accuracy, prevents errors, and supports reliable supplier management.

Key Point Checklist

This article has covered the following key knowledge points:

• Describe the purpose and structure of purchases and purchase returns day books
• Explain how to record credit purchases and returns in day books and ledgers
• Post total credit purchases/returns to the payables control account and purchases/purchase returns accounts
• Record transactions in individual supplier accounts in the payables ledger
• Use credit notes as essential documentation for purchase returns
• Reconcile payables control account with supplier balances and identify errors

Key Terms and Concepts

• Purchases Day Book
• Purchase Returns Day Book
• Payables Ledger
• Payables Control Account
• Invoice
• Credit Note
• Reconciliation