What Type of Account Is Purchases in Accounting?

Accounting relies on a structured system of accounts to classify and summarize financial transactions, providing a clear picture of a business’s financial health. Understanding each account’s purpose is fundamental for accurate record-keeping and financial reporting. The “Purchases” account serves a specific role in tracking the acquisition of goods intended for resale.

Defining the Purchases Account

The “Purchases” account is a temporary account used to record the cost of merchandise or raw materials acquired for resale or production. It represents the gross amount of goods bought during an accounting period. While it contributes to the calculation of Cost of Goods Sold, it is considered a direct cost component of sales rather than a general operating expense.

This account carries a normal debit balance, meaning increases are recorded as debits. Each time a business acquires inventory for resale, the Purchases account is debited, increasing its balance. These acquisitions are distinct from purchases of long-term assets, such as equipment or buildings, or supplies consumed internally, which are recorded in separate asset or expense accounts.

How the Purchases Account Functions

The Purchases account records the acquisition of inventory. When a business buys goods for resale, a journal entry debits the Purchases account and credits either Cash (if paid immediately) or Accounts Payable (if bought on credit). For example, a $5,000 purchase on credit debits Purchases and credits Accounts Payable for $5,000.

As a temporary account, it accumulates transactions throughout an accounting period. At period end, its balance is closed out to the Income Summary account or directly into the Cost of Goods Sold calculation. The Purchases account balance is a primary component in determining the Cost of Goods Sold (COGS) on the income statement, calculated by adding beginning inventory to net purchases and subtracting ending inventory. This calculation directly impacts a business’s reported gross profit and overall profitability.

Purchases in Different Inventory Systems

A dedicated “Purchases” account is primarily used in the periodic inventory system. In this system, inventory levels are not continuously updated after each purchase or sale. The Purchases account accumulates the cost of all goods bought for resale throughout the period. At the end of the accounting period, a physical count determines the ending inventory balance and calculates the Cost of Goods Sold.

In contrast, the perpetual inventory system does not use a separate “Purchases” account. Under a perpetual system, inventory records are continuously updated in real-time with each purchase and sale. When goods are acquired, the Inventory asset account is directly debited, rather than a Purchases account. Cost of Goods Sold is also recorded at the time of each sale, providing an ongoing view of inventory levels and costs.

Adjustments to Purchases

The initial amount in the Purchases account is refined by contra-expense accounts that reduce the total cost of goods acquired. These adjustments lead to “Net Purchases,” which represent the true cost after deductions. One common adjustment is “Purchases Returns and Allowances,” for goods returned to suppliers or price reductions granted. This contra-expense account carries a normal credit balance and directly reduces the gross amount of purchases. Another adjustment is “Purchases Discounts,” which are reductions in the purchase price offered by suppliers, often as an incentive for early payment. This account also has a normal credit balance, lowering the cost of purchases when discount terms are met.