Meaning of Purchase Sales and Stock

Purchase

Purchases include buying goods in exchange for a money with the intention of selling them further to customers.

Sales

A Sale involves transfer of goods or services for money, it is often supported with various taxes to be paid to Government like:- VAT, Central Sales Tax, etc. Sales can be divided into two categories Cash and credit.

Gross Profit

Gross profit is equal to difference in sales and purchase price of the goods and deducting the direct expenses therefrom.

Trade Discount

Trade discount is a discount allowed from the list of goods. It is offered based on customer’s status whether Retailer or wholesaler. While entering sales revenue, trade discount is deducted from the list price.

Cash Discount

Cash discount is a discount allowed as an incentive to the customers to make prompt payments. Cash discount is not deducted from sales revenue but is recognised separately.

Stock

The term ‘stock’ means goods remaining unsold on a particular date. To ascertain the value of the closing stock, it is necessary to make a complete list of all the items in the godown.

Method of stock valuation

First in First out method is a costing method whereby the goods purchased first are assumed to be the goods sold so that the closing stock consists of the recently purchased goods. This method is justified on the basis that stock in hand is the one most recently purchased or produced & is, hence, closer to the market price. The cost of goods sold represents the cost of items acquired in the earlier purchases. It is a useful method when prices remain fairly stable.

Last in First Out method is a costing method whereby the last goods purchased are assumed to be the first goods sold so that the closing stock consists of the goods first purchased. The method is based on the logic that cost of goods sold should reflect latest costs & profits & should be booked accordingly.

Average Cost Method is a costing method whereby each quantity to be averaged is assigned a weight & the prices are averaged after multiplying them by the weighted quantities. This determines the relative importance of each quantity when calculating the average. A new average price has to be worked out on each purchase of materials.

Transaction

A transaction is a process to record the financial dealings like purchase & sales in the organisation there are different type of transactions like:-

Transactions can be classified as follows:

    • Cash Receipts
    • Bank Receipts
    • Cash Payments
    • Bank Payments
    • Sales
    • Purchase

    Read more about ratio in accounting course offered by IPA