Purchase account

From CEOpedia | Management online

Purchase account - emanate from the purchase ledger an account in which money spending on some goods and services in an appropriate period is report on the debit side.

Purchases on account

Purchase on account is a payment method in which goods are acquired and payment is deferred (C. Gilbertson, M. Lehman, 2012, p. 236). Purchases, in other words the cost account, is used first and foremost in order to record the merchandise purchased. Other purchased items, for example supplies, should not be recorded in a purchases account but in the other account, like Supplies (L. Epstein, 2010, p. 294). Merchandise as well as other purchased goods are reported and recorded at the price that has been agreed upon in a moment when the transaction took place. In the case, where the actual figure paid for buying some merchandise or other goods or items is applied the accounting concept called Historical Cost. Some of businesses buy on account only from a several vendors keep general ledger separate for all vendors. It is important to summarize the total amount owed to each of vendor in a single general ledger account to avoid an enormous general ledger (C. Stickney, 2010, p. 406).

Merchandise purchases

The merchandise purchases for resale not belong to spending. There are classified as purchases. This term has specialized, limited meaning. It involves only the purchase of merchandise for resale. Purchases of merchandise are ascribed in the purchases normal ledger account and afterwards is recorded as a cost of goods sold account, which is defined as actual merchandise cost selling to customers in a single accounting period. The purchases account is used in computing cost of goods sold as only one element (L. Walther, 2010, p. 29).

  • An example: The company's car tires or paper towel for coffee place would not be regarded as purchases (except if you bought these goods/items in order to sale). The tires and paper towels would be classified as spending if you bought them for using by your own business (B. Needles, 2006, p. 297).
  • A liability account titled Accounts Payable is summarizing the amount owed to all of vendors Accounts Payable own a usual credit balance, in which the accounts payable account decreases by a debit and increases by credit (M. Schaeffer, 2004, p. 283).

Examples of Purchase account

  • Purchase of Computers: This account would include all expenses related to the purchase of computers, including hardware, software, and accessories. It would also include any associated installation and setup fees.
  • Purchase of Office Supplies: This account would include all expenses associated with the purchase of office supplies, such as paper, pens, and printer ink.
  • Purchase of Furniture: This account would include all expenses associated with the purchase of furniture, such as desks, chairs, filing cabinets, and other office furniture.
  • Purchase of Raw Materials: This account would include all expenses associated with the purchase of raw materials, such as wood, steel, fabric, and other materials used in the production of goods.
  • Purchase of Advertising: This account would include all expenses associated with the purchase of advertising, such as radio and television spots, print ads, and online campaigns.

Advantages of Purchase account

A purchase account is a ledger account used to record all of a company's purchases of goods and services in an appropriate period. The following are the advantages of having a purchase account:

  • It provides a record of all the money spent on goods and services, as well as the items purchased. This helps to ensure that the company is not overspending or buying unnecessary items.
  • It helps to keep track of suppliers and the amount owed to them, as well as any discounts or rebates that may be applicable.
  • It helps to keep track of the quality of goods and services purchased.
  • It is an effective way to manage inventory, as it allows for an accurate account of how much has been purchased in a certain period and how much is in stock.
  • It helps to ensure that the company is compliant with taxation and other regulations.
  • It also provides an accurate record of how much money is being spent on particular items, which can help to inform future purchases.

Limitations of Purchase account

The purchase account is a ledger account used to record the money spent on goods and services in an appropriate period. However, the account has some limitations which include:

  • It does not provide detailed information about the purchase expenses, such as the exact items purchased, quantity and price.
  • It does not provide any information about the quality of the purchased goods or services.
  • It does not provide any information about the mode of payment used for the purchase.
  • It does not provide any information about the suppliers from whom the goods and services were purchased.
  • It does not provide any information about the terms of payment agreed upon with the suppliers.
  • It does not provide any information about the taxes and duties applicable to the purchases.
  • It does not provide any information about the discounts offered by the suppliers.
  • It does not provide any information about the delivery schedule and any other special conditions associated with the purchase.

Other approaches related to Purchase account

Introduction: There are various other approaches related to purchase accounts.

  • Purchase returns: It is an approach to record the returns of goods or services received from the vendor due to any reason, such as defectiveness or unsuitability, in the purchase account. It is recorded on the credit side of the account.
  • Purchase discounts: It is an approach to record the discounts given by the vendor on goods or services purchased. It is recorded on the credit side of the account.
  • Freight and insurance charges: It is an approach to record the freight and insurance charges incurred on the goods purchased. It is recorded on the debit side of the account.
  • Taxes: It is an approach to record the taxes and duties incurred on the goods purchased. It is recorded on the debit side of the account.
  • Bad debts: It is an approach to record the amount unpaid by the debtors on goods or services purchased. It is recorded on the debit side of the account.

In summary, there are various approaches related to purchase accounts such as purchase returns, purchase discounts, freight and insurance charges, taxes, and bad debts.


Purchase account — recommended articles
Purchase returns and allowances — Purchase ledger — Purchases ledger — Purchases journal — Net purchases — Purchase invoice — Debit Note — Output tax — FOB destination

References

Author: Patrycja Wojcik

Retrieved from "https://ceopedia.org/index.php?title=Purchase_account&oldid=95870"