The amount of goods purchased by a business firm for selling purposes or to use as raw material for some products to be sold, is called purchase. So, the term purchase covers the following basic criteria:-
- The goods are purchased only for resale without doing any further processing or modifications.
- The goods are purchased as raw material and are sold after doing some further processing or modification.
Purchase never includes the following:-
- Purchase of fixed assets. For example – purchase of plant and machinery, building, furniture, motor vehicles etc.
- Purchase of item relating to the administration and selling expenses of business. For example – stationery purchased for office use, postage stamps purchased, advertising material purchased, fuel purchased for motor cars and miscellaneous items purchased for day to day functioning of an office.
The accountant has be very much cautious while allocating expenditure relating to purchase of various items. Purchases relating to fixed assets are shown in the balance sheet while purchases relating to goods for resale purpose, are shown in trading account and the purchases relating to other items are allocated in various account heads as per the nature of purchases. Purchases may be in cash or on credit basis. In case of credit purchase, payment is made at a future date. All credit purchases are written in purchase day book and the cash purchases are written cash book. All the purchases are shown in trading account in debit side.
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