One of the most common types of document that needs to be processed within a business are purchase invoices. Therefore, it is essential that you understand the journal entries required to record a purchase invoice within the accounting system.
What is a purchase invoice?
A purchase invoice is a document received from a supplier whenever you make a purchase of goods or services. The purpose of the invoice is to show exactly what you have purchased and how much this will cost you. The invoice provides all of the necessary details to record the purchase on the accounting system and ensure that you keep track of which suppliers you owe money to (and when these payments are due)
Which general ledger accounts do purchase invoices affect?
Given that the invoice relates to amounts owed to a supplier, the key account that a purchase invoice affects is the purchase ledger control account (in order to show that this is a trade creditor).
Also, since the invoice relates to a business expense, the other account that it affects will be a p&l expense account. The treatment will differ slightly if the invoice is for the purchase of inventory or an asset but, for the sake of example, we will treat this as an invoice for general business expenses.
What is the journal entry to record a purchase invoice?
Now that we know the relevant ledger accounts, we can record the double entry as follows:
Purchase invoice received:
- Record trade payable – CR purchase ledger control account
- Record expense – DR p&l expense account
If the invoice also includes VAT, an extra line in the journal entry will be required to record this as follows:
Record input VAT – Dr VAT control account
Example
A worked example of the journal entry required to record a purchase invoice is as follows:
Let us imagine that a business has received an invoice from a supplier, for the purchase of cleaning products. The goods are worth £100 with VAT charged amounting to £120, giving a total gross invoice price of £120.
In this scenario, the business now owes a supplier £120, has incurred cleaning product expenses of £100 and can reclaim VAT of £20 from HMRC.
Therefore the journal entry required to record this is as follows:
- DR Cleaning product expenses (P&) £100
- Dr VAT control account £20
- Cr Purchase ledger control account £120
This journal entry ensures that all the related accounts to the purchase invoice have been updated and the expense for the products has hit the profit and loss account while the liability has hit the balance sheet.
What if the goods have been received but the invoice hasn’t?
In this scenario, it is important to remember the accruals concept which provides the answer to this question. According to the accruals concept, expenses must be recorded at the point they are incurred NOT when the cash is paid over (or the invoice received).
Therefore, if goods have been received but the invoice is yet to be issued, the expense for the goods must still be recorded.
This can be done by recognising an “accrual” for the goods which sits as a liability on the balance sheet, in place of the trade creditor.
The particular name for this accrual is “GRNI” accruals which stands for “Goods Received Not Invoiced”. The journal entry for a GRNI accrual is as follows (using the same numbers in the example above).
- DR Cleaning product expenses £100
- CR GRNI Accrual
PLEASE NOTE: for this example we did not account for VAT on the goods and that is because no VAT invoice has been received as of yet. As such many management accountants simply recognise the net cost of the goods in the accrual and this is cleared out (and VAT recognised) when a VAT invoice has actually been received. If you are unsure in this area please consult the HMRC website for further guidance or discuss with a VAT specialist.
What if the goods haven’t been received but an invoice has?
This is quite a rare and unlikely scenario but it CAN happen from time to time. We have written a full post regarding this issue so we recommend that you refer to the post which can be found here.
Ultimately in this scenario, no entries should be recorded as no expense has truly been incurred under the accruals concept. However many finance teams realise that ignoring an invoice can lead to it going missing/unrecorded and therefore an entry, essentially the opposite to a GRNI accrual, may be recorded.
Please note – the above is our interpretation of the accounting standards requirements for recording purchase invoices, please take time to consult the relevant reporting framework and ensure that you agree with our treatment before taking it is as final. Failing this, please consult with an accounting professional who can assist you in this process.
