Every business transacts with products, for which it is very important to have the product first because without the product the transaction cannot take place. A business either acquires the product from another business or manufactures it itself or both. If the product is acquired from another business or person by giving something in return, then it is called a purchase in accounting.
Purchases are classified on the basis of product into raw materials, semi-finished goods, and finished goods and on the basis of finance into cash and credit. This classification of purchases helps in preparing various reports. In accounting, purchases are treated and managed in different ways, depending on the transaction and business. Note that if there is a purchase for one person, there will be a sale for another person and vice versa.
Table of Contents
What is Purchase?
Purchase means taking or acquiring a product by giving something in return. When a product is purchased, all the rights to it are also acquired along with it. In accounting, purchase refers only to those products for which trading transactions are done and these are shown in manufacturing account, trading account, etc. In purchase, the one who purchases the product is called the buyer and the one from whom the product is purchased is called the seller.
According to accounting, purchases can be made in two ways, one is cash, and one is credit. In cash, payment has to be made at the same time, and in credit, payment has to be made later. When purchases are made on credit, the person who buys becomes a debtor and the person who sells becomes a creditor and both parties show the opposite side on their balance sheet.
Features of purchase
The following are the features of the purchase:
1. Expense:
In accounting, purchases are treated as expenses because purchases are the cost of running business operations and are shown in the manufacturing account and trading account. If the business prepares a manufacturing account, it shows raw materials and semi-finished goods in it and finished goods in the trading account. If the business does not prepare a manufacturing account, it shows all purchases in the trading account.
2. Something in Return:
Taking a product from someone will be called a purchase only when something is given in exchange for that product, if the product is taken without giving anything in return then it will not be called a purchase. Taking a gift from someone and giving a gift to someone does not come under purchase. If a business gives a product to someone without taking anything from them then it will not be called a sale and it will not be a purchase for the recipient.
3. Only Trading Products:
In accounting, purchase is considered only when the trading transaction of the purchased product is done such as raw material, semi-finished goods, and finished goods, etc. In simple language, a purchase is called when the product is bought to earn money by selling it, if the product is not bought with the intention of selling it then it will not be called a purchase.
4. Helpful in Earning Income:
Purchase is helpful in earning income because to earn income first a transaction has to be done and for transactions, it is very important to have a product, and mainly the product is acquired through purchase. Any business runs on buying and selling, without transactions a business has no existence.
5. Helpful in Calculating Gross Profit or Loss:
Purchases are helpful in calculating gross profit or loss because all the contents of the trading account are required to calculate gross profit and loss and purchases are one of those contents. If the debit side of the trading account is more then there is gross loss and if the credit side is more then there is gross profit.
6. Shown on the Financial Statements:
Purchases are shown on financial statements such as manufacturing account, trading account, etc. Due to the applicable of nominal account rules in the manufacturing account and trading account, purchases are shown on the debit side. In manufacturing account, purchases are shown to calculate the cost of the product, and in trading account, purchases are shown to calculate the gross profit or loss.
Read Also:
QNA/FAQ
Q1. What is Purchase?
Ans: Purchase means taking or acquiring a product by giving something in return.
Q2. When is purchase called in accounting?
Ans: In accounting, a purchase is called when a product is bought for a trading transaction.
Q3. Is a purchase an expense?
Ans: Yes, a purchase an expense.
Q4. What is credit purchase?
Ans: When the product purchased is paid for later it is called a credit purchase.
Q5. Are purchases shown on the trading account?
Ans: Yes, purchases are shown on the trading account, and it is shown on the debit side.
Q6. Write the features of purchase.
Ans: The following are the features of the purchase:
1. Purchase is an expense.
2. Purchase is called only when something in return is involved.
3. Purchase is called only when the purchase is made for the trading transaction.
4. Purchase helps in calculating gross profit.
5. Purchase helps in calculating the cost of production.
6. Purchase helps in generating income.
7. Purchase is shown on the financial statements.
8. Purchase is made at a certain price.
