1 Topic by t2webby (edited by t2webby 07/09/2008 08:52:52 pm)

  • From: Canada
  • Registered: 06/04/2008
  • Posts: 72

Topic: How does the Purchases / C.O.G.S works?

I'm a little confused behind the logic of how the GL for the purchases account works. Usually this account is recorded in concurrent with when a PO invoice... With a credit going to accounts payable and debits going to the Inventory for the amount set out on the PO. But what about Purchases account? Should this account not also be debitted with the same amount going into inventory as well? Reason is, when we do a balance sheet to be able to calculate the the C.O.G.S wouldn't we need the exact purchases expense of what is currently purchased within the year?

How does the Purchases (C.O.G.S) account relate to the dispatching of a SO? Shouldn't it just be a straight Credit to the inventory and debit to the sales account and not have to touch the Purchases Account? Since this was already delt with when a PO invoice was created for the purchase in the first place?

Do I make any sense at all? smile

  • joe
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  • Registered: 03/15/2007
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Re: How does the Purchases / C.O.G.S works?

Hello,
When you get a supplier invoice, the Stock account is debited in GL with the purchase price as well as VAT is debited. and the AP account is credited.
When the Delivery Note to Customer is despatched the Stock account is credited with the average cost and the C.O.G.S account is debited with the same amount.
When invoicing the sales account is credited as well as VAT accounts and the AR account is debited.

/Joe

3 Reply by t2webby (edited by t2webby 07/09/2008 09:46:20 pm)

  • From: Canada
  • Registered: 06/04/2008
  • Posts: 72

Re: How does the Purchases / C.O.G.S works?

Understood, however what about the Purchasing Account when we get the supplier invoice? Should the Expense Purchase Account be Debited at this point as well? Debiting Stock is a for sure thing after an invoice, but should we not be tracking the purchasing expense as well and debiting its invoice. I don't see how you could do it I guess with GL. It's obviously has to come from somewhere to balance the two sides.

Cause if I look at my balance sheet, I would want to know in my Expense column the total C.O.G.S, which one of the expense account being the Purchases which should reflect how much I have purchased during the year. If it's only RECORDED during a sales order transaction, then the only way to determine the exact Purchased expenses is to reference it with the look at the Inventory amount that is left...

Is this the best way to get the actual current purchases C.O.G.S?

  • From: Canada
  • Registered: 06/04/2008
  • Posts: 72

Re: How does the Purchases / C.O.G.S works?

Sorry guys, I think everything is fine... Was just confused on what the Purchases actually represents. I guess what I was trying to accomplish is to get some type of 'Cash payed to Supplier' type purchase and realize the only way to really accomplish this is to factor in the beginning and end inventory amount + purchases to get the actual COGS amount. A manual process but I don't see any way around it... unless someone else can share light on this matter?

  • joe
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Re: How does the Purchases / C.O.G.S works?

Hello again,
When you buy from your supplier, you buy to stock, not purchase account. The cost of goods sold is first debited when you make the delivery and the stock is credited. This is the normal way of doing it.
Think of it this way. You increase the stock when purchasing from the supplier. But if you should debit the purchase at this point you should credit the stock, but the stock is still there. First when the stock leaves with a delivery note the stock can be credited and now the COGS is debited.
Maybe still confusing, but...

/Joe