Inventory Purchases: Definition, Accounting, Calculation, Journal Entry, Formula

Follow us on LinkedIn

For companies in the manufacturing or retail industry, inventory is the primary tool to generate revenues. These companies acquire or create goods they can sell further for a profit. Usually, the process begins with obtaining the required goods that the company can put for sale. Sometimes, it may also involve processing or converting the acquired items.

What is Inventory?

Inventory refers to goods, raw materials, or products companies use to generate revenues. Sometimes, it may also include intangible assets. The primary purpose of inventory within a business is to sell to customers in exchange for compensation. Inventory is a part of the balance sheet in accounting, where it appears under current assets.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

For most manufacturing companies, inventory includes raw materials, work-in-progress and finished goods. Usually, companies acquire raw materials from a supplier. Then, they work on the obtained items to convert them to finished goods. Until it reaches that stage, the inventory is known as a work-in-progress.

What are Inventory Purchases?

Inventory purchases refer to the process used to acquire inventory from suppliers. For companies, it involves finding an appropriate supplier that offers competitive prices. Once selected, the company can place an order with the supplier for any amount of goods required. The supplier then processes the order and delivers the goods to the company.

Inventory purchases may also refer to the account maintained to record acquired inventory. While the inventory account appears on the balance sheet, inventory purchases are a part of the income statement. There, it plays a crucial role in calculating the cost of goods sold. The inventory purchases account holds details of all inventory acquisitions during a single accounting period.

How to calculate Inventory Purchases?

Usually, companies record every goods acquisition transaction in the inventory purchases account. The closing balance on that account at any time constitutes the inventory purchases for that period. Alternatively, companies can also use a formula to calculate the amount, which is as below.

Inventory purchases = Closing inventory – Opening inventory + Cost of goods sold

What is the journal entry for Inventory Purchases?

The journal entry for inventory purchases may include two steps. The second step does not relate to the acquisition process. However, it is a part of the process of acquiring inventory.

When a company acquires inventory, it may do so on credit from the supplier. The journal entry at this stage is as follows.

Dr Inventory purchases
Cr Accounts payable

If the company pays cash instead of obtaining credit, the credit side of the entry will be the cash account. On top of that, the second stage is not necessary since the cash transaction closes the cycle. If the transaction occurs on credit, the company must repay the supplier later. At this point, the company will record the compensation as follows.

Dr Accounts payable
Cr Cash or bank

Conclusion

Inventory refers to goods held by a company for processing and selling. Usually, it includes raw materials, work-in-progress and finished goods. The inventory cycle within a company starts with inventory purchases. Usually, it involves acquiring goods from relevant suppliers. These purchases become a part of the income statement and can also impact the balance sheet.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSCanadians showing more support for striking workers amid inflation, corporate profits
Canadians showing more support for striking workers amid inflation, corporate profits

It was Samantha Henry’s first time on strike, and one that made headlines across the country. “Some people thought the strike would only last a week, a couple of days. And we went into almost five weeks,” said Henry, one of some 3,700 Metro employees…

Stay up-to-date with the latest news - click here
LATEST NEWSInflation likely gained pace in August, economists expect, reversing progress
Inflation likely gained pace in August, economists expect, reversing progress

OTTAWA — Economists are forecasting inflation reaccelerated to around four per cent last month, reversing previous progress made as gasoline prices push inflation higher. Statistics Canada’s August consumer price index report set to be released Tuesday is expected to show the annual inflation rate rose…

Stay up-to-date with the latest news - click here
LATEST NEWSUS national security adviser meets with Chinese foreign minister
US national security adviser meets with Chinese foreign minister
Stay up-to-date with the latest news - click here
LATEST NEWSShiba Inu (SHIB) Profitability Is Finally Back at Double-Digit Level
Shiba Inu (SHIB) Profitability Is Finally Back at Double-Digit Level
Stay up-to-date with the latest news - click here
LATEST NEWSA Fed decision, FedEx earnings and the UAW strike: What to know this week
A Fed decision, FedEx earnings and the UAW strike: What to know this week
Stay up-to-date with the latest news - click here

Leave a Reply