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How are cash purchases recorded on a company's income statement?

Modified on: 2018/07/16

Cash purchases are recorded more directly in the cash flow statement than in the income statement. In fact, specific cash outflow events do not appear on the income statement at all. Rather, different items on the operating section of a company's income statement are affected by the balance of cash purchases, credit purchases and other previously recorded transactions. One of the limiting features of the income statement is it does not show when revenue is collected or when expenses are paid.

Any investor who wants to look at cash purchases should instead look at the cash flow statement. The cash flow statement further differentiates between cash purchases for financing activities, investing activities and operating activities. For really detailed entries, cash payments are listed in the general ledger by crediting the cash account and debiting the corresponding payable.

Role of the Income Statement

In financial accounting, the income statement is designed to show summaries of financial activity on a quarterly or annual basis. These summaries are drawn from the general ledger. There may be footnotes in an income statement that describe specific cash purchases, but this is not a reliable source for specific line item details.

Operating Section of the Income Statement

With larger, exchange-listed companies, cash flows are most likely built into the revenue and expenses portion of the operating section. Any cash purchases made in the course of normal operations increases the recorded expenses of the company.

Depending on the company in question, the expenses portion may be broken down into more specific sub-categories. Even in these cases, specific cash purchases are not recorded. The aggregate of all cash purchases and other cash outflows is instead built into the figures listed in the expenses portion.

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