What is Purchase & Sale?

Definition of Purchase.

A purchase is the act of paying a predetermined amount of money to obtain possession of a specific asset, property, item, or right in order for the transaction to be completed successfully. In other terms, it's a transaction in which money is exchanged for a specific commodity or service.

Purchase in Accounting.

In accounting, the cost of purchasing inventory or items for resale in the usual course of business is referred to as purchases. As a result, purchases are classified as an expense and are reflected in the income statement as part of the cost of goods sold. Purchases in accounting may involve the cost of purchasing raw materials in a manufacturing company. Purchase, on the other hand, refers to the purchase of finished items for resale in the retail industry.

However, it is critical to understand that in accounting, we must distinguish between the purchases described above and other transactions, such as those involving the acquisition of fixed assets (e.g. factory, plant and machinery, motor van, land and building, etc.). Rather than being expensed in the income statement, acquisitions for fixed assets are capitalized in the statement of financial position of the firm (i.e., they are recognized as assets of the business). Trading, profit and loss account is another name for the income statement.

Accounting for Purchase.

As a result of the transaction, the business's expenses have increased but its assets have decreased. Expenses must therefore be debit, while assets must be credited. An increase in inventory is likewise a result of a purchase, but inventory accounting is handled distinct from purchase accounting.

Purchase on Cash:

When a trader buys items and pays for them right away, this is known as a cash purchase. When making a cash purchase, make the following duplicate entry:

To account for the rise in expense, purchase is debited. Because there is a drop in cash (asset) following payment of the items, cash is credited.

Purchase on Credit:

When a buyer and seller exchange items, but payment is postponed, this is known as a credit purchase. When a credit purchase is made, the following double entry is made:

You will have a rise in Creditor if you purchase products on credit. Creditors are the persons to whom you owe money.

The credit entry is made in the payable ledger rather than the cash ledger, as it is in the event of a cash purchase.

The payable balance will be decreased to nil after the payable is paid his due (depending on whether he has old debts or not). The following double entry is made:

Definition of Sales.

Sales is an activity that leads to a transaction between two or more parties in which the buyer receives the offering and the seller receives something of value in return, usually money.

Sales in Accounting.

Sale The gross inflow of economic advantages is known as revenue. It can't be deducted from your expenses. The sale is made as a result of the company's normal operations. Profits made from activities that are not part of the company's primary business operations are recorded as profits rather than sales income. For example, sale revenue is income made from selling tires in a business whose primary goal is to sell tires. If the company sells one of its industrial machines, the transaction's income is reported as a gain rather than revenue.

Except for gains in equity produced by owner contributions, sale revenue is an increase in equity within an accounting period (equity participants). Revenue from sales must result in an increase in the entity's net assets (equity), such as through the inflow of cash or other assets. However, an entity's net assets may increase solely as a result of more capital investment by its owners, even though this increase in net assets cannot be considered revenue from a sale.

Revenue from sales may generate from the following sources:

• Goods sold
• Proving services
• Interest, royalties, and dividends are examples of revenue generated from the use of an entity's assets by third parties.

Accounting for Sale.

Because the sale increases the entity's revenue and assets, assets must be debited and income must be credited. A sale reduces inventory as well, but inventory accounting is kept separate from sale accounting, as will be detailed more in the inventory accounting section.

A sale can be made with cash or on credit.

Sale on Cash:

When you make a cash sale, make the following double entry:

To account for the rise in cash of the entity, cash is debited.

To account for the increase in income, Sale is credited.

Sale on Credit:

When a credit sale occurs, the following double entry is made:

Except when a different asset account is debited, the duplicate entry is identical to that of a cash sale (i.e. Debtor).

The receivable balance will be brought to nil when the receivable pays his due. The following double entry is made:

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