Purchase Invoice
An invoice is considered a purchase invoice when received as a request to make payment for goods or services purchased or performed. This invoice specifies details of the product or services and serves as a record of purchases with details such as terms of agreement, applicable discount and other related details of transaction.
The same invoice can be a sales invoice or a purchase invoice depending on the perspective. So when a seller issues an invoice after delivery of the goods or service, this is called a sales invoice as they intend to record sales with the issue of this document. In contrast, when the same invoice is received by a buyer with the delivery of goods or service, this is called a purchase invoice because they need to record the purchase with the invoice received. Let’s now elaborate with an example:
Purchase Invoice Example
Company A is the seller and sends an invoice to company B (buyer) for a delivery of 500 mirror frames. Company A will issue the invoice and record sales in their financial statement. Since the invoice is issued for sales and a receivable is recorded against this document, it is called a sales invoice (seller perspective).
When this same invoice is received by a buyer, (Company B), they will need to record the purchase of the 500 mirrors in their accounting record. This is called a purchase invoice from the buyer’s perspective as they record purchase/payable based on this document received from the seller.
Free purchase invoice template (Excel / Google sheets)
Purchase Invoice Processing
Following are the steps in the purchase invoice processing cycle:
Purchase requisition
This is an internal document to verify the need for purchases. It is usually approved by the head of the department or senior manager of the department that is requesting the purchase.
Raise purchase order
Based on a purchase requisition, the purchase order is generated by the purchasing department. The purchase order contains details such as the approved quantity, specifications and the price of the products to be ordered.
Receive goods and purchase invoice
On the receipt of goods, a goods received note is prepared. This acts as proof or record that goods were received. Similarly, the invoice is received from the supplier as a request for payment.
Update accounting system
Based on documents like invoices, purchase orders and goods received notes, the purchase entry is posted in the accounting system as discussed above.
Make payment
Payment is made on a due date and accounts payable is debited.
Purchase Invoice in Accounting
From an accounting perspective, a purchase invoice is received from the supplier and is used to process the payable/payment. While entering the purchase invoice in the accounting system, details on the invoice such as product specifications, quantity and price are reconciled with the goods received note and purchase order. Next will be a discussion on the detailed accounting treatment for recording the purchase invoice.
Purchase Invoice Journal Entry
To post a purchase invoice, the following journal entry is posted in the accounting system:
| Description | Debit | Credit |
| Expense /PPE/ Inventory | XXX | |
| Accounts payable | XXX |
To debit purchases, we need to analyze the nature of the item purchased. The following circumstances can occur:
- The item is purchased for selling purposes. So it is classified in the inventory account.
- If the item is to be consumed by the business within a year, it is classified as an expense.
- If the item is to be consumed by the business for more than a year, it is classified as property, plant, equipment and expensed by way of depreciation.
So, if the item is purchased for selling purposes, the inventory account will be debited. On the other hand, accounts payable is credited as the business has acquired the present obligation to pay off economic benefits. The next question that needs to be answered is whether a purchase invoice is a debit or credit.
Is a Purchase Invoice a Debit or Credit?
A purchase invoice carries both debit and credit impacts. The item purchased is debited to the relevant account. For instance, if inventory is purchased, the inventory account is debited. If a consumable product is purchased, expense account is debited and so on. On the other hand, the credit impact is a creation of a liability as the business has acquired a present obligation to pay in the future.
Example # 01 (inventory purchase)
The laptop retailing company purchases 100 laptops, each costing $700. The following journal entry needs to be posted:
| Description | Debit | Credit |
| Inventory (Current asset) | $70,000 | |
| Accounts payable | $70,000 |
The asset account is debited as (laptops) inventory is to be sold.
Example #02 (Property, plant and equipment purchase)
The construction company purchased a crane costing $11,000. The following journal needs to be posted:
| Description | Debit | Credit |
| Property, plant & equipment (Non-current asset) | $11,000 | |
| Accounts payable | $11,000 |
Property, plant and equipment account is debited as the useful life of the crane is expected to be more than one year.
Example #03 (Expenses incurred)
The business pays the monthly electricity bill for the office amounting to $7,000, The following journal needs to be posted:
| Description | Debit | Credit |
| Bill Expense | $7,000 | |
| Accounts payable | $7,000 |
The expense account is debited as the bill was paid for in the one accounting period. In other words, the expense is recorded in a month because electricity was consumed during a month.
Please note that in all the above examples, accounts payable is common as the business has acquired a present obligation to pay irrespective of the purchase items. It is also important to note that different companies have different procedures, policies and controls to post purchase invoices. However, the basic mechanism remains the same.
Why is accounts payable credited when posting a purchase invoice?
Accounts payable is credited when a purchase is made on credit. The reason is that by purchasing goods on credit, the business acquires an obligation to pay economic benefits in the future. That is why accounts payable is credited while posting the purchase invoice in the accounting system as well as the financial statement of the business.
Conclusion
A purchase invoice is generated and sent by the supplier. It contains details of goods or services received from them. A purchase invoice is different from a purchase order as a purchase order is a procedural document and a purchase invoice is an accounting document. The purchase invoice is used to update the accounting ledger while a purchase order is used just to execute the purchase function. Similarly, a purchase order is issued and sent by the buyer, while the purchase invoice is generated and sent by the supplier.
There are both debit and credit impacts of posting the purchase invoice in the accounting system. The invoice needs to be analyzed to select the appropriate chart of account for debit impact. On the flip side, the credit impact is accounts payable if the purchase is made on credit.
Different companies have different purchase processing controls and policies. However, the basic process of purchase include making purchase requisitions, purchase orders, goods received notes, getting purchase invoices and making payments.
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