How Cash Purchases Are Recorded on a Company’s Income Statement

Cash purchases are recorded more directly in a company’s cash flow statement than in its income statement. In fact, specific cash outflow events do not appear on the income statement at all. Rather, 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 previously recorded transactions. One of the limiting features of the income statement is that it does not show when revenue is collected or expenses are paid.

Any investor who wants to look at cash purchases should instead look to the cash flow statement. It further differentiates among cash purchases for financing activities, investing activities, and operating activities. For even more-detailed entries, cash payments are listed in the general ledger, which credits the cash account and debits 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 an 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 purchase 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 subcategories. 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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