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December 31, 2007

Is there a difference between the accounts Purchases and Inventory?

The account Purchases is generally associated with the purchase of inventory items under the periodic inventory system. Under the periodic system the account Inventory is dormant until it is adjusted to the cost of the ending inventory at the end of an accounting period.

Under the perpetual inventory system, the account Purchases won’t exist. Rather, the cost of inventory items purchased will be recorded directly into the account Inventory.

Under the periodic system, the cost in the account Purchases will be added to the cost of the beginning inventory to arrive at the cost of goods available. The cost of the ending inventory is computed through a physical count (or an estimate) and is subtracted from the cost of goods available. The resulting amount is the cost of goods sold.

Under the perpetual system, the balance in the account Inventory should be the cost of the ending inventory. Under the perpetual system, the cost of goods sold will have been removed from the account Inventory when the items were sold and placed in the account Cost of Goods Sold.

Learn more about Inventory & Cost of Goods Sold.

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12 Responses to “Is there a difference between the accounts Purchases and Inventory?”

  1. sameer on January 3rd, 2008 1:07 am

    what is reconciliation statement

  2. ibr on January 3rd, 2008 9:07 am

    Yes.
    Puchasess : is when cash account is Debited puchasess acount will be cridited.
    Inventory : is the list of the items puchasessed

  3. salima on January 7th, 2008 5:44 am

    Reconciliation statement is the statement that reconciling two different document,it may be cash book with the bank statemet that is bank reconciliation statement

  4. kirs on January 9th, 2008 11:19 am

    Purchases : movement of goods and cash or credit transaction. Consists of purchase on cash & credit, returns, etc. consits also of inventory and non inventory items

    Inventory: goods that remains after a periodic transactions….

  5. Rosli on January 12th, 2008 4:30 pm

    Yea.. Thanks for the info..
    B4 this I’m quite confuse how to differentiate between purchase acc & inventory account bcoz what I learn in uni was just update purchase account..
    So, they are not teaching about perpetual inventory system….

  6. izhar on March 31st, 2008 4:34 am

    its a good way to learn something special most of us are confused in diffrent question but this site is playing good roll not for students even teaches also take advantages from this site. thanks Accounting coach

  7. cebe on April 11th, 2008 1:06 pm

    I am applying for a bookkeeping job and needed to refresh my memory from 20 years ago taking accounting classes. This site with the queston and answers has really helped me feel confident that I can get and to the job.
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  8. cebe on April 11th, 2008 1:07 pm

    I am applying for a bookkeeping job and needed to refresh my memory from 20 years ago taking accounting classes. This site with the queston and answers has really helped me feel confident that I can get and do the job.
    Thanks Accounting Coach!

  9. Jouj on May 31st, 2008 11:42 pm

    In the periodic method, when calculating the GIT at the end of the year do you also include in the purchases or only accrue the payable on B/S.

    is this entry correct

    Dr Inventory B/S (GIT)
    Cr A/P

    Dr. Purchases
    Cr. Inventory (I/S)

  10. Allan on September 15th, 2008 12:53 am

    Periodic Method:

    Under periodic you don’t keep a running balance in the Inventory account, meaning you do not ever debit or credit Inventory until the end of the period after an inventory count has been done.

    Here’s an example. At the time of the last physical inventory count, we determined that we had 50 units in Inventory at a cost of $35 per unit. Our Inventory account should be at $1,750 and must not be changed until we do our adjusting entries at the end of the period (after the next physical count).

    Now, a month after we did our physical inventory count, during the month we had purchased 150 units at $35 each, for a cost of $5,250. We sold 125 units at $55 per unit.

    When we purchase goods, this is how we record it:

    Purchases $5,250Dr
    Accounts Payable $5,250Cr
    Note: Purchased 150 units at $35 each.

    When we sell goods, this is how we record it:

    Accounts Receivable $6,875Dr
    Sales $6,875Cr
    Note: Sold 125 units at $55 each.

    You don’t do anything else besides that. Purchase returns are recorded as follows:

    Accounts Payable (Debit)
    Purchase Returns and Allowances (Credit)

    Period end, we do a physical count and find that we have 69 units left in our physical inventory. Here’s what we do:

    Cost of Goods Sold 4,585
    Inventory, Ending (from physical count) 2,415Dr
    Purchases 5,250Cr
    Inventory, Beginning (current balance) 1,750Cr

    Cost of Goods Sold can only be determined by entering in the rest of the debits and credits for the other accounts in the journal entry. Cost of Goods sold in a periodic system will always be the numerical difference between the debits and credits in the journal entry.

    If you have a Purchases Returns and Allowances account or Transportation-in, you also have to close those accounts into Cost of Goods Sold at the end of the period.

    Remember, the only time you will have a Cost of Goods Sold account in a periodic system is at the end of the period, and it will be a temporary account. In a perpetual system, it will be a permanent account. Also, your Inventory balance will always be the *beginning* balance, from the beginning of the period where the last physical count and adjusting entries were made.

    -Allan, 2-year Business Accounting Graduate

  11. Allan on September 15th, 2008 1:03 am

    *Note to above.

    I didn’t mean to say that Cost of Goods Sold was permanent in a perpetual system, because technically it’s still a temporary account since it’s closed into Retained Earnings (or your Capital account.)

    However, I mean to say that Cost of Goods Sold will be used for every purchase, return, or sale in the perpetual method of inventory valuation. In contrast with the periodic method, Cost of Goods Sold will never be used until the end of the period when we need to make adjustments.

    -Allan, 2-year Business Accounting

  12. stormy love on August 27th, 2009 5:24 pm

    i still don’t understand the difference between perpetual and physical inventories could u please give me some advantages and disadvantages of both?

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