Course Outline
Join PRO

Are the goods purchased by a retailer an expense or an asset?

Harold Averkamp, CPA, MBA

Definition of Goods Purchased by a Retailer

The goods purchased by a retailer are the products or merchandise that it buys and plans to resell.

The goods that are sold during the accounting period must be reported on the retailer’s income statement as the cost of goods sold.

The goods that are unsold at the end of the accounting period must be reported on the retailer’s balance sheet as inventory.

Accounting for the Goods Purchased

There are two ways to record the goods at the time the goods are purchased:

  • Their cost could be recorded in an expense account (such as Cost of Goods Sold)
  • Their cost could be recorded in an asset account (such as Inventory)

Either way, the Inventory account must be adjusted to the actual amount. The other part of the adjusting entry is recorded in the income statement account.

Examples of Accounting for Goods Purchased

Assume that a retailer begins the year with inventory having a cost of $800. It ends the year with inventory having a cost of $900. During the year the retailer purchased goods at a cost of $7,000. Let’s also assume that the cost per unit did not change during the year.

If the retailer records the $7,000 of purchases as an expense (cost of goods sold), then at the end of the year the retailer’s adjusting entry must debit Inventory for $100 (since the inventory has increased from $800 to $900). The other account in this adjusting entry is the expense Cost of Goods Sold which is credited for $100. As a result, the income statement will report the cost of goods sold at $6,900 ($7,000 minus the $100 credit). The balance sheet will report inventory of $900 ($800 plus the debit of $100).

If the retailer records the $7,000 of purchases as an asset, the Inventory account balance increases from $800 to $7,800. Since the actual inventory at the end of the year is $900, the adjusting entry must credit Inventory for $6,900 ($7,800 minus $900) and debit Cost of Goods Sold for $6,900.

Regardless of whether the goods purchased were initially recorded as an expense or as an asset, the amounts must be adjusted so that the financial statements report the expense (reported as the cost of goods sold on the income statement for the year) at $6,900 and the asset inventory (reported on the balance sheet as of the end of the year) at $900.

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews



PRO Plus

Lifetime Access (One-Time Fee)
Word Scrambles
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on

Learn More About Harold

Certificates of

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus