The purchases account is a general ledger account in which is recorded the inventory purchases of a business. This account is used to calculate the amount of inventory available for sale in a periodic inventory system.
Under the periodic system, the amount of purchased inventory is compiled throughout a period and added to the beginning inventory to arrive at the amount of inventory available for sale. A physical count at the end of the period establishes the ending inventory valuation, which is subtracted from the amount of inventory available for sale to arrive at the cost of goods sold for the period. Thus, the calculation in which the contents of the purchases account is used is:
(Beginning inventory + Purchases - Ending inventory) = Cost of goods sold
The purchases account is not used in a perpetual inventory system, where inventory purchase and usage transactions immediately update the inventory records, with the intent of maintaining accurate record balances at all times (not just at the end of the reporting period).
As an example of the periodic inventory system, ABC International has a beginning inventory balance of $800,000 and purchases $2,200,000 of inventory during the month. It conducts a physical inventory count at month-end to arrive at an ending inventory balance of $1,100,000. Therefore, the cost of goods sold of ABC for the month is $1,900,000, which is calculated as:
($800,000 Beginning inventory + $2,200,000 Purchases - $1,100,000 Ending inventory)
The amounts recorded in the purchases account may be for raw materials that will require subsequent conversion to be made ready for sale, or they may be for completed merchandise.