Accounting Records in the book of Purchaser and Vendor

In a typical sales transaction, the accounting records differ for both the purchaser and the vendor (seller). The purchaser acquires an asset, which may be recorded differently based on whether it is a cash purchase or a credit purchase. On the other hand, the vendor recognizes revenue from selling goods or services.

Example Transaction:

Let’s assume that on January 1, Company A (Purchaser) buys machinery from Company B (Vendor) on credit for ₹1,00,000. The purchase agreement includes 10% GST (Goods and Services Tax). The payment terms stipulate that Company A will pay the amount in two equal installments after 6 months, along with an interest charge of 12% per annum on the outstanding balance.

Books of the Purchaser (Company A)

In the purchaser’s books, the transaction will include entries to record the acquisition of the asset (machinery), the recognition of a liability for the purchase, and the interest charges for the credit period.

Journal Entries in Purchaser’s Books:

Explanation of Purchaser’s Entries:

1. January 1 Entry: The purchase of machinery is recorded along with the input tax credit for the GST paid. The entire purchase amount, including GST, is recognized as a liability (Accounts Payable).
2. June 30 Entry: At the end of 6 months, interest is charged at 12% on the unpaid balance. The first installment, along with interest, is paid to the vendor.
3. December 31 Entry: At the end of the year, the second installment and remaining interest are paid off.

Books of the Vendor (Company B)

In the vendor’s books, the transaction will include entries to record the sale of machinery, the recognition of receivables, and the interest income from credit sales.

Journal Entries in Vendor’s Books:

Explanation of Vendor’s Entries:

1. January 1 Entry: The vendor records the sale of machinery as a credit transaction. Accounts Receivable is recognized for the total sale amount, including GST. The sale value is credited, and the GST payable is recognized.
2. June 30 Entry: The first installment is received, and interest income is recorded for the outstanding balance. Accounts Receivable is adjusted accordingly.
3. December 31 Entry: The final installment is received, and any remaining interest income is recorded. The accounts receivable is cleared once the final payment is made.

Comparison of Entries in Purchaser’s and Vendor’s Books