What is purchase?
A product is bought to resell an end user is called purchase. The purchases or buying goods to resell to a consumer apply in supply chain business and goods can either be purchased from a manufacturer or a supplier. A purchase is a tangible product, and title of product ownership eventually transfer to an end user, whom we also name a consumer.
Gross profit depends on the purchase price, and it is one of the most important components in a business. A better price brings a boom in sales, income, and equity. Purchase at right price consider a vogue and victorious decision in business. Therefore, various vendors must be questioned for quotation and compare with companies before commit to commence a purchase.
Purchase in a fiat currency VS Purchase in Crypto or Digital Currency?
Purchase topic will remain incomplete if we do not discuss the impact of digital and fiat currency on purchases. Because the digital currency is becoming popular gradually and it is vital to under digital currency implications as well along with tradition or fiat currency.
Fiat currency is controlled by central banks which is less volatile and surprising in fluctuation compared to digital or crypto currency. The fiat currency would not immediately impact on business, whereas digital or crypto leave an immediate impact on business.
Illustration number one: Digital currency was used to pay for a purchase which was inclined in value shortly after the delivery of goods:
A Sam Bakery in New York bought confectioneries worth of $10,000.00 in digital currency and currency inclined next day by $300.00. Growth in currency was 0.03% over $10,000.00.
Inclined in currency empowered the purchasing power of Sam Bakery immediately by $480.00.
Explanation:
- Increase value in currency $300.00 + Assumed, Gross profit of 60% which is $300.00 *60% equals $180.00
- Same Bakery has instant growth of $480.00 due to an instant increment in a currency.
- Same Bakery’s purchasing power is increased by $480.00 rather than $300.00.
- Increment in value organically is not taxable and separately reportable. It is an organic growth in currency. Apparently looks great if there is not a declined in currency.
Illustration one goes in favor of Sam Bakery.
Whereas, if the currency declined Sam would have a loss of $300.00 due to the currency fluctuation rather than $480.00.
How to record a purchase activity for a business in accounting ledgers?
A supplier invoice is created when products are received, and it impacts as it is highlighted below:
- Purchase is debited under cost of goods, whereas it credited either by accounts payable or cash.
- Purchase is the part of the income statement, whereas accounts payable or cash relates to balance sheet decrease in cash or an increase in liability.
A CPV or cash payment voucher is created when payment is made to a supplier which is highlighted below:
- Debit to accounts payable whereas cash/bank is credit.
- Both accounts payable and cash/bank accounts are part of the balance sheet.
Reminder- Reminding you again that accounting is based on equilibrium algorithm where both the sides must be equaled. Likewise, in accounting a debit and credit balance different financial reports and each number and activity in business has a relationship with other to balance.
Reconciliation of accounts payables and purchases:
Like other accounts of general ledger, accounts payable and purchase accounts are also required to be reconciled to make sure payments have been made to suppliers and goods have been received and the goods are in a salable condition.
Reconciliation of accounts payable:
Accounts payable lists on the balance sheet under current liabilities and from the aging report of the accounts payable every vendor account must be reconciled with the physical inventory count to confirm goods are landed safely in the warehouse, and they are not damaged.
Reconciliation of purchases:
Prior to making payment to suppliers’ inventory must be checked physically to make sure goods that were ordered are as per the agreement and safely reached in the warehouse.
