Purchases

Definition

Purchases refer to the acquisition of inventory by a company for resale or production. These transactions are recorded in the accounting system to track inventory levels and costs.

5 Must Know Facts For Your Next Test

1. Purchases are initially recorded at cost, including all expenses directly attributable to bringing the inventory to its present location and condition.
2. In a perpetual inventory system, purchases are continuously updated in the inventory account as they occur.
3. In a periodic inventory system, purchases are recorded in a temporary purchases account and adjusted at the end of the accounting period.
4. Purchase returns and allowances reduce the total amount of purchases and must be accounted for separately.
5. The cost flow assumptions (FIFO, LIFO, Weighted Average) impact how purchases affect ending inventory values and cost of goods sold.

Review Questions

• How are purchases recorded differently in perpetual vs. periodic inventory systems?
• What types of costs can be included in the purchase price of inventory?
• How do purchase returns and allowances affect the total amount of purchases?

Related terms

Inventory:

Items held for sale in the ordinary course of business or used in producing goods or services.

Cost of Goods Sold (COGS): The direct costs attributable to the production of goods sold by a company.

FIFO (First-In, First-Out): An inventory valuation method where the oldest items purchased are assumed to be sold first.