Journal Entry for Purchasing Raw Materials
Overview
In the manufacturing company, purchasing raw materials is a common occurrence that may happen many times during the accounting period as the company usually constantly needs both direct raw materials and indirect raw materials to use in the production. Likewise, the company needs to make the journal entry for purchasing raw materials by recognizing and recording the raw materials when the company receives them before further records can be made when they are used in production.
The raw materials usually include both direct raw materials and indirect raw materials. However, the company usually uses only one account, e.g. raw materials inventory, to record both direct raw materials and indirect raw materials. Recording both direct and indirect raw materials into only one account helps to ease the process of receiving and recording the raw materials.
The company may purchase the raw materials from the suppliers on account or on credit, or it may purchase using cash. Likewise, the journal entry for purchasing raw materials on credit will increase both total assets and total liabilities on the balance sheet. On the other hand, if the company purchases raw materials using cash, there will be zero impact on total assets on the balance sheet as one asset (raw materials) increases while another asset (cash) decreases in this case.
Journal entry for purchasing raw materials
The company can make the journal entry for purchasing raw materials by debiting the raw materials inventory account and crediting the accounts payable or cash account depending on whether the company purchases raw materials on credit or using cash.
| Account | Debit | Credit |
|---|---|---|
| Raw materials inventory | 000 | |
| Accounts payable / cash | 000 |
In this journal entry, the raw materials inventory is recognized and recorded at the cost and its normal balance is on the debit side. This raw materials inventory account usually includes both direct raw materials and indirect raw materials. Likewise, when the company transfers the raw materials to use in the production, the balance of the raw material inventory account will reduce regardless the raw material transferred out is the direct raw materials or indirect raw materials.
This is why we usually see both work in process account and manufacturing overhead account in the recording of raw materials used in the production, in which both of them appear as the deduction of raw materials inventory.
Purchasing raw materials example
For example, on December 31, the company ABC which is a manufacturing company purchases $10,000 raw materials on credit from one of its suppliers. The company ABC receives all the purchased raw materials on the same day of December 31.
Then, on January 31 in the later year, the company ABC pays $10,000 to its supplier to settle this credit purchase.
In this case, the company ABC can make the journal entry for purchasing raw materials on December 31, by debiting the $10,000 into the raw materials inventory account and crediting the same amount into the accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Raw materials inventory | 10,000 | |
| Accounts payable | 10,000 |
In this journal entry, both total assets and total liabilities on the balance sheet increase by $10,000 as of December 31.
Later, on January 31, when the company ABC pays the $10,000 to settle the credit purchase, it can make the journal entry by debiting the accounts payable of $10,000 to remove it from the balance sheet and crediting the same amount to the cash account.
| Account | Debit | Credit |
|---|---|---|
| Accounts payable | 10,000 | |
| Cash | 10,000 |
It is useful to note that the company should make the journal entry for purchasing raw materials on the day of receiving the raw materials as crossing the cutoff date without recording them in the account will lead to the misstatement on financial statements. For instance, in the example above, if the company does not record the purchase of raw materials on December 31 and its year-end date is on December 31, there will be an understatement of total assets by $10,000 and an understatement of total liabilities by the same amount in the year-end financial statements.
Of course, the company should not make the journal entry if it has not received the raw materials yet even after the purchase order has been sent out to the supplier. For example, if the company ABC has not received raw materials on December 31, there should be no recording either. There would be an overstatement of total assets and total liabilities instead if it made the journal entry before receiving the raw materials.