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

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 NEWSDo-not-eat listing draws lawsuit from Maine lobster industry
Do-not-eat listing draws lawsuit from Maine lobster industry

PORTLAND, Maine (AP) — A coalition representing the Maine lobster industry is suing an aquarium on the other side of the country for recommending that seafood customers avoid buying a variety of lobster mostly harvested in their state. Industry groups including Maine Lobstermen’s Association are…

Stay up-to-date with the latest news - click here
LATEST NEWSIMF Sees ‘Policy Setbacks’ in Argentina in Latest Review
IMF Sees ‘Policy Setbacks’ in Argentina in Latest Review

The International Monetary Fund called on Argentina to make stronger efforts to address foreign reserve losses, galloping inflation and other “policy setbacks” amid a severe drought that’s hitting the country’s crucial commodities sector.

Stay up-to-date with the latest news - click here
LATEST NEWSInvestors Are Searching for Safe Spaces in Banking
Investors Are Searching for Safe Spaces in Banking

Uninsured deposits and interest-rate risk may be key variables for investors—but size could be one of the most important.

Stay up-to-date with the latest news - click here
LATEST NEWSTitanium Transportation Group Reports Strong FY 2022 Financial Results
Titanium Transportation Group Reports Strong FY 2022 Financial Results

Revenue up 24% to Record $496 million and Adjusted EBITDA up 94% to $60.8 millionEarnings Per Share More than Quadruples from 12 cents per share to 55 cents per share BOLTON, Ontario, March 13, 2023 (GLOBE NEWSWIRE) — Titanium Transportation Group Inc. (“Titanium” or the…

Stay up-to-date with the latest news - click here
LATEST NEWSHomeowners who held onto a 3% mortgage rate are becoming ‘accidental landlords’
Homeowners who held onto a 3% mortgage rate are becoming ‘accidental landlords’

99% of borrowers have a mortgage rate lower than 6%, according to Goldman Sachs, and some are choosing to rent out their homes instead of selling.

Stay up-to-date with the latest news - click here

Leave a Reply