12.2 How is inventory accounted for? (Cost of Purchases)

Question 1

Where is the cost of the purchased goods recorded in?

Answer 1

Inventory account as cost of purchases.

Question 2

What does the cost of purchases include?

Answer 2

Cost price of the goods and any expenses incurred to obtain or prepare the goods before they are ready to be sold.

Question 3

Specifically, what does the cost of purchases include?

Answer 3

1. Cost price, which is the price of the goods agreed with the supplier
2. Freight and delivery charges incurred to transport the goods from the supplier to the business (Carriage on purchases / Freight inwards / Carriage inwards)
3. Import duties or taxes on goods purchased from overseas
4. Freight insurance to cover any possible loss from damage or lost goods during transportation
5. Packing materials to repack the goods
6. Salaries paid to workers hired to process the goods.

Question 4

On 15 September 20X5, Whatts Books had the following costs related to a credit purchase of 100 copies of the book, Guide to POA, from Goodbooks Publisher:

(i) Cost of books at $480
(ii) Delivery charges of $20

(a) Calculate the cost of purchases
(b) What is the double entry to record the purchases?
(c) What is the credit entry if cash is paid when the goods are purchased?

Answer 4

(a) Cost of purchases = $480 + $20 = $500
(b) Dr Inventory Cr Trade Payable - Goodbooks Publisher
(c) Cr Cash at bank or Cash in hand

Question 5

What is the cost of purchases also commonly known as?

Answer 5

Cost price

Question 6

What is the price that the goods are being sold known as?

Answer 6

Selling price. Note that the selling price is usually higher than the cost of purchases.