Buying on credit: the Creditors Journal and its allowances

Buying on credit creates a debt, not an expense

When Ndlovu Electrical Supplies takes delivery of stock from Bosman Wholesalers and agrees to pay at the end of the month, two things change and neither one is cash. The business now holds goods it did not hold before, and it now owes money it did not owe before.

The goods are an asset, so Trading stock is debited. The debt is a liability, so Creditors control is credited. Liabilities increase on the credit side, which is the mirror image of debtors. A debtor is money coming towards you and sits on the debit side. A creditor is money going away from you and sits on the credit side.

Nothing here is an expense. Stock only becomes an expense later, when it is sold and turns into Cost of sales.

Not everything bought on credit is stock

A hardware business buys stock on credit, but it also buys stationery, cleaning materials, packing material and sometimes equipment on credit. Those are different accounts, so the Creditors Journal (CJ) is ruled with several analysis columns: Creditors control on one side, and Trading stock, Stationery, Consumable stores, Equipment and Sundry accounts on the other.

The rule for the columns is simple. The Creditors control column records what the supplier is owed, which is always the full invoice amount. The analysis columns record what the business received. At month end the Creditors control column total is credited to Creditors control, and each analysis column total is debited to its own account. The two sides must come to the same number, because they were the same invoices read twice.

Worked example. On 3 March, invoice 4471 arrives from Bosman Wholesalers for trading stock of R6 400.

The business is holding R6 400 more stock, so Trading stock is debited R6 400. The business owes R6 400 more, so Creditors control is credited R6 400, and Bosman Wholesalers' own account in the creditors ledger is credited R6 400 as well.

Assets go up R6 400 and liabilities go up R6 400. Owner's equity does not move at all, which is the honest answer: buying stock on credit makes you no richer and no poorer. You have simply swapped a promise for goods.

Sending goods back to the supplier

If stock arrives damaged or wrong, the business returns it and issues a debit note, which is a request for the supplier's account to be reduced. The supplier answers with their own credit note.

The entry reverses the purchase. The business holds less stock, so Trading stock is credited. The business owes less, so Creditors control is debited. These returns are listed in the Creditors Allowances Journal (CAJ).

The creditors side has a control account and a creditors list working exactly like the debtors side: the total of every supplier's closing balance must equal the Creditors control balance, because both were built from the same journals.

A note on VAT

Most supplier invoices in South Africa show VAT at 15% on top of the price of the goods. A business registered as a VAT vendor records the goods at the price before VAT and keeps the VAT separate, because that VAT is money it will claim back rather than a cost of doing business.

Unless a question tells you an amount includes VAT, record the figures you are given. When a question does say an amount includes VAT, the VAT portion is the total multiplied by 15/115, because the total is 115% of the price before VAT. An invoice of R2 300 including VAT therefore contains R300 of VAT and R2 000 of goods.

Core checkpoint: Say the sentence before you write the entry. On credit purchases the sentence is: we received something and we now owe for it. The thing received is debited to whichever account describes it, and the amount owed is credited to Creditors control. On returns the sentence runs backwards: we sent something back and we owe less.