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Mark89
Level 1

Purchases vs Cost of sales?

So I'm struggling to work out the difference between Purchases vs Cost of sales?

When I go into the banking section and look at expense, for invoices that relate to items I have purchased to re sell am I correct they go into the Purchases section? if so what exactly goes into cost of sale?

 

11 REPLIES 11
JamesC
QuickBooks Team

Purchases vs Cost of sales?

Hey Mark89,

 

You can use either, don't try to work out the difference. Normally purchases is used for generic and general business purchases, as long as the VAT code is right, that counts. When you're using stock, or tracking your cost of the sale manually; you can use a cost of sale account.

 

If you have a plus account, stock will use a Cost of Sales account as default when tracking stock using our standard system.

 

Any purchase expense account or any cost of sales expense account can be renamed to be called what you want anyway.

 

Thanks,

Malcolm Ziman
Level 10

Purchases vs Cost of sales?


@JamesC wrote:

Hey Mark89,

 

You can use either, don't try to work out the difference. Normally purchases is used for generic and general business purchases, as long as the VAT code is right, that counts. When you're using stock, or tracking your cost of the sale manually; you can use a cost of sale account.

 

If you have a plus account, stock will use a Cost of Sales account as default when tracking stock using our standard system.

 

 


"You can use either, don't try to work out the difference. "  Asker asked the question meaning he wants to know the difference.

"Normally purchases is used for generic and general business purchases, " No, this is not right.

 

According to accounting principles there is a clear difference between Purchases vs Cost of sales. Purchases is part of COS. 

 

If you are using the stock tracking feature of QBO Plus, and use "Items", which uses the "perpetual" system of stock accounting, then there is no Purchases account.  Purchases of stock are allocated to the stock asset linked to the Item, at time of purchase, in the Items section of an Expense or Bill transaction.  When stock is sold, the stock asset account is reduced and the COS account is increased.    This is done automatically by the computer

 

Cost of Sales is a COS type expense account, that only is correctly charged when goods are sold, as the name says

In the "periodic" system of stock accounting, i.e NOT using the stock tracking feature of QBO, all purchases of stock for resale, can be allocated to a Purchases COS type expense account, but a stock asset account can also be used.  It does not matter which because they are both dynamic and change as stock is sold, so neither is always right.   Periodically, month-end or year end, whenever accurate reports are needed, stock is physically counted, and a Journal Entry is made between the stock asset account and the COS account , to correctly reflect the value of stock on hand, offset to a Change in Stock account.   The COS section of the P&L has 2 lines: Purchases and Change in Stock

 

Rustler
Level 15

Purchases vs Cost of sales?


@Malcolm Ziman wrote:

Cost of Sales is a COS type expense account, that only is correctly created when goods are sold, as the name says

 

Cost of sales is typically used for a service type business, or a business that does not usually stock inventory.

 

In the "periodic" system of stock accounting, i.e NOT using the stock tracking feature of QBO, all purchases of stock for resale, can be allocated to a Purchases COS type expense account, but a stock asset account can also be used. 

 

It does not matter which because they are both dynamic and change as stock is sold, so neither is right. When stock is sold, the stock asset account is reduced and the COS account is increased.  

 

Ahh no,  That is the issue with periodic inventory, nothing happens automatically.  Adjustments to the value of COGS and inventory only happens after you enter a journal entry as you explain in the rest of this.

 

Periodically, month-end or year end, whenever accurate reports are needed, stock is physically counted, and a Journal Entry is made between the stock asset account and the COS account , to correctly reflect the value of stock on hand, offset to a Change in Stock account.   The COS section of the P&L has 2 lines: Purchases and Change in Stock

 


 

juliaah33
Level 2

Purchases vs Cost of sales?

Hi,

 

I use a separate Inventory tracking software for ecommerce. So Inventory items and tracking have been turned off in Quickbooks.

I was told to assign Purchases to an asset account "Inventory Asset" account and manually enter a journal entry at end of every month (increasing cost of sales account and decreasing Inventory Asset)

 

When I was doing my tax return, my account asked me why my "Purchases" weren't showing up in the Profit and Loss report I said cause it was in the Asset account.

 

Should Stock Purchases be shown in the Profit and Loss? should I have set up another account  Purchases that links to Inventory Asset that shows up in the P&L?

Rustler
Level 15

Purchases vs Cost of sales?


@juliaah33 wrote:

Hi,

 

I use a separate Inventory tracking software for ecommerce. So Inventory items and tracking have been turned off in Quickbooks.

I was told to assign Purchases to an asset account "Inventory Asset" account and manually enter a journal entry at end of every month (increasing cost of sales account and decreasing Inventory Asset)

 

When I was doing my tax return, my account asked me why my "Purchases" weren't showing up in the Profit and Loss report I said cause it was in the Asset account.

 

Should Stock Purchases be shown in the Profit and Loss? should I have set up another account  Purchases that links to Inventory Asset that shows up in the P&L?


You are correct in the way you are doing it and the reason.

 

There are two ways to do this, most accountants like to post all purchases to an expense account (COS) and at year end do a journal entry to move inventory value on hand to an asset account, run the related tax reports, then do another journal entry on the first of the new year moving that asset value back to COS.  (some do that every month)

 

Double the work, and the P&L shows full purchase cost during the year which is not accurate.

 

Posting purchases to an asset account and journaling the monthly cost to COS, means your P&L is accurate each month, and inventory on hand is in fact an asset so that is correct too.

DaveMus
Level 1

Purchases vs Cost of sales?

I'm confused by this too as a new user of quickbooks (my first ever foray into accountancy software)

 

We own a pizza business so most of our expenses are either ingredients & other consumables (flour, cheese, firewood etc) or equipment we use in the kitchen (peels, knives, dough mixers, tupperware etc).

 

I've been putting all the consumables down as "Cost of Sales" and all the equipment purchases down as "Purchases". Is this wrong? I'd be grateful for clarification (in simple terms please)

 

I haven't done a VAT submission yet so have time to correct!

Thanks

Angelyn_T
QuickBooks Team

Purchases vs Cost of sales?

Thank you for choosing QuickBooks Online, @DaveMus.

 

You'll use purchases when a business buys inventory intending to resell by making a profit. On the other hand, the cost of sales is the cost of inventory items sold by the business in a certain period.

 

At this time, I recommend consulting your accountant for help in selecting which to use in tracking stocks. For reference, check out these articles: 

 

 

Post again if you have any other questions. I'm always here to help. Have a good day!

juliaah33
Level 2

Purchases vs Cost of sales?

Thank you. I will check out those articles. What if you have inventory turned off? Can you set up 1 non inventory item “Stock Purchases “ that links to the appropriate accounts so you can see the total “Purchases on the P&L as well as the cost of sales 

MirriamM
Moderator

Purchases vs Cost of sales?

Hello again, @juliaah33.

 

Yes, you can set up a non-inventory item even if inventory is turned off.

 

Cost of sales measures and accumulates a total of all costs for a product with inventory type. For the cost of sales to show up on the report, you'll have to ensure the product type of each item. 

 

You can consider reading this article and learn how stock tracking impacts your reports: Impacts of stock tracking on balance sheet and profit & loss reports.

 

Leave a comment below if you have follow-up questions. I'm here to answer it for you. Have a great day!

boatmike
Level 1

Purchases vs Cost of sales?

Quote from above thread: "You'll use purchases when a business buys inventory intending to resell by making a profit. On the other hand, the cost of sales is the cost of inventory items sold by the business in a certain period."

 

I'm under the impression that Cost of Goods Sold (COGS) is the "Cost of inventory items sold by the business" and that Cost of Sales (COS) is the cost of the items that it took to sell that Inventory. For example the cost of a widget and the box its sold in would be COGS but the cost of the bubble mailer it was shipped to the customer in would be COS?

The terms COGS and COS seem to get used interchangeably by quite a few people in these forums and I find it quite confusing. Can anyone clear this up for me? I'm actually trying to figure out if Non Inventoried Shipping supplies (ie; bubble mailers) are a COS or simply an Office supply expense.

Thanks in advance !

 

Rustler
Level 15

Purchases vs Cost of sales?

@boatmike 

 

COGS is the cost of inventory sold

COS is the cost of services in a service type business

 

Outbound shipping is an operating expense as is any material used for that purpose.