When a purchase on account is made, the supplier invoice becomes evidence of what for the buyer?

Introduction / Context:
Credit purchases are very common in business, and understanding how they are recorded is fundamental to double entry accounting. When a business purchases goods or services on account, it receives an invoice from the supplier. Exam questions often ask what this invoice represents for the buyer to ensure students can distinguish between liabilities and assets created by such transactions. Correctly recognising the invoice as evidence of a liability helps maintain accurate records of amounts owed to suppliers.

Given Data / Assumptions:

• The buyer obtains goods or services from a supplier on credit rather than paying cash immediately.
• The supplier issues an invoice detailing the amount owed, terms and due date.
• The buyer agrees to pay the amount on or before the due date stated on the invoice.
• The transaction is part of normal business operations and will be settled in the near future.

Concept / Approach:
From the buyer perspective, a purchase on account creates a present obligation to pay the supplier. This obligation fits the definition of a liability. In the accounting records, this is usually recorded as accounts payable. The supplier invoice is documentary evidence of this liability, specifying the amount, terms and other details. It does not represent an asset for the buyer, because the buyer does not expect to receive economic benefits from the invoice itself; rather, the benefit has already been received in the form of goods or services.

Step-by-Step Solution:
Step 1: Recognise that a credit purchase involves receiving goods or services now and agreeing to pay later. Step 2: Understand that this agreement creates a present obligation for the buyer to pay cash in the future. Step 3: Record the purchase by debiting the appropriate asset or expense account and crediting accounts payable. Step 4: Use the supplier invoice as source documentation showing the details of the liability. Step 5: Settle the liability later by debiting accounts payable and crediting cash when payment is made.

Verification / Alternative check:
Imagine a retailer buys inventory worth 40,000 units of currency on credit from a wholesaler, with payment due in 30 days. The wholesaler issues an invoice for 40,000. The retailer records a debit to inventory and a credit to accounts payable for 40,000. The accounts payable balance represents a debt to the supplier. When the retailer pays, it debits accounts payable and credits cash, eliminating the liability. At all times until payment, the invoice serves as evidence of the debt, confirming that it represents a liability, not an asset or revenue for the buyer.

Why Other Options Are Wrong:
Option B is wrong because accounts receivable represent amounts owed to the business by customers, not amounts the business owes to suppliers. Option C is incorrect because the expense or asset associated with the purchase may have been recognised, but the invoice indicates an unpaid liability rather than something already settled in cash. Option D misclassifies the invoice as owner equity, but liabilities reduce equity rather than increase it. Option E is incorrect because revenue arises when goods or services are sold to customers, not when the business receives invoices from suppliers.

Common Pitfalls:
A common pitfall is confusing the direction of credit purchases and credit sales, especially when learning both accounts payable and accounts receivable at the same time. Another mistake is thinking that the presence of an invoice always signals revenue, forgetting that invoices received from suppliers are different from invoices issued to customers. Students may also overlook the importance of invoices as supporting documents for liabilities, which can lead to weak internal control. Remembering that a purchase invoice received indicates a debt owed by the buyer helps classify the item correctly as a liability.

Final Answer:
A debt or liability owed by the buyer to the supplier, usually recorded as accounts payable until it is settled.