How are cash purchases recorded in a company’s income statement?
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 in the income statement at all. On the contrary, different items appearing in the operating section of a company’s income statement are impacted by the balance of cash purchases, credit purchases and other transactions recorded previously. One of the limiting features of the income statement is that it does not show when income is collected or when expenses are paid.
Any investor who wishes to consider cash purchases should instead refer to the cash flow statement. The cash flow statement further distinguishes between cash purchases for financing activities, investing activities and operating activities. For truly itemized postings, cash payments are listed in the general ledger, which credits the cash account and debits the corresponding debts.
Role of the income statement
In financial accounting, the income statement is designed to present summaries of financial activity on a quarterly or annual basis. These summaries are taken 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 item details.
Operational section of the income statement
With large publicly traded companies, the cash flow is most likely built into the income and expense portion of the operations section. Any cash purchase made in the course of normal operations increases the recorded expenses of the company.
Depending on the company in question, the expenses part can be broken down into more specific sub-categories. Even in these cases, specific cash purchases are not recorded. Rather, the total of all cash purchases and other cash outflows is incorporated into the figures shown in the expense section.
(For more information, see “An introduction to the income statement. “)