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.