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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?

 

5 REPLIES 5
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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,

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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

 

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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

 


 

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Level 1

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?

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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.