Metroline Coaches buys diesel on credit from Farid Fuels for $2,400 on 12 June. The company keeps a full set of ledgers and posts every credit purchase from...
Question 1 Report
Metroline Coaches buys diesel on credit from Farid Fuels for $2,400 on 12 June. The company keeps a full set of ledgers and posts every credit purchase from its purchases day book at the month end. Identify the correct pair of entries for this transaction.
Answer Details
This tests the double entry for a credit purchase, where goods or services are received now and paid for later. Two things happen at once: an expense is incurred, and a liability to the supplier is created.
The diesel is an expense of buying goods for the business, so the purchases account is debited with $2,400. Metroline does not pay yet, so it now owes Farid Fuels, and a liability is recorded by crediting the supplier's personal account. The correct pair is therefore debit purchases, credit Farid Fuels. The credit sits in the purchases ledger, and it will be cleared later by a debit when the invoice is settled.
Reversing the entries, debiting Farid Fuels and crediting purchases, would record the opposite: that Farid Fuels owes Metroline and that the company has sold something. Any entry involving bank is wrong at this date, because no money has moved on 12 June; bank only enters the records when the invoice is actually paid.
Examination reminder: the word "credit" in "credit purchase" tells you the timing of payment, not which side the purchase goes on. The purchase itself is still a debit.
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