On May 20th, Viva Phones Ltd purchased five Galaxy S25 Ultra smartphones from their supplier for cash at $1800 plus GST. Viva Phones Ltd follows the periodic inventory system to track its inventory. What is the correct journal entry to record this transaction in Viva Phones Ltd’s books?

Question

BlackTom AI · Accepted Answer

Purchases under a periodic inventory system are recorded to the Purchases account (not Inventory), and GST paid on purchases is recorded as an input tax asset (GST receivable). The supplier price and quantity determine net cost, GST is calculated separately, and the total cash paid equals net cost plus GST.

1) Relevant knowledge points and concepts
- Periodic inventory system: purchases of inventory are debited to Purchases (an expense/contra‑equity account) during the period; Inventory is adjusted only at period end.
- GST on purchases: GST paid is an input tax credit for the buyer and recorded as GST receivable (asset), not GST payable.
- Double-entry principle: debits must equal credits.

2) Step-by-step reasoning
- Calculate net purchase amount: 5 phones × $1,800 each = $9,000.
- Calculate GST (assume 10% standard rate): $9,000 × 10% = $900.
- Total cash paid = net purchase + GST = $9,000 + $900 = $9,900.
- Under periodic system debit Purchases for $9,000, debit GST receivable for $900, and credit Cash at Bank for $9,900.

3) Calculations (intermediate steps)
- Quantity × unit price: 5 × $1,800 = $9,000.
- GST: $9,000 × 0.10 = $900.
- Total payment: $9,000 + $900 = $9,900.

4) Why the correct answer is correct
- Debiting Purchases records the cost of goods bought during the period under a periodic system.
- Debiting GST receivable recognizes the input tax credit the business can claim.
- Crediting Cash at Bank for $9,900 records the outflow of cash to pay the supplier.
- Debits ($9,000 + $900) equal Credits ($9,900), satisfying double‑entry.

5) Why other options are incorrect
- Option with DR Inventory: under periodic system you do not debit Inventory on purchase (that’s for perpetual system).
- Option with DR Accounts payable: transaction was for cash, not on credit, so Accounts Payable is incorrect.
- Option debiting GST payable: GST on purchases is an input (receivable) for the buyer, not a liability payable.

6) Conclusion
The correct journal entry is: DR Purchases $9,000; DR GST receivable $900; CR Cash at Bank $9,900, which matches the provided answer.

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