Accounting for Purchases, Assets, and Acquisition Costs

Are Purchases Considered Operating Expenses?

Yes, purchases are operating expenses. An expense is the economic value of the resources that are used up or consumed in the operations of the reporting entity. The difference between assets and expenses is that assets produce future economic benefits, while an expense is the economic value of the resources that are used up or consumed. As assets are used by the entity, a portion of their value is considered an expense (depreciation, for example).

Understanding Asset Impairment

Asset impairment occurs when the sum of the expected cash flows from the assets is less than the book value of the asset. Accounting practices require that long-term assets be evaluated for impairment. If a reduction is made in the carrying value because of impairment, it is recorded as a loss.

Purchases of Merchandise vs. Cost of Goods Sold

The difference between purchases of merchandise and cost of goods sold (COGS) is that purchases of merchandise are the total purchases in a period, whereas the cost of goods sold is the price of the total purchases that have been sold in that period.

Components of Merchandise Acquisition Cost

The acquisition cost represents the value of the products that a retailing or wholesaling company intends to resell for a profit.

Purchase Cost Includes:

• Asset price minus discounts.
• Any additional cost directly related to the asset and required to prepare it for its intended use.
• Non-recoverable taxes and custom duties.
• Interest accrued until the asset is ready for its intended use.

Production Cost Includes:

• Acquisition cost of goods and services.
• Direct costs incurred by the company.
• A reasonable amount of indirect costs.

Accounting for Transportation Costs

In the case of purchases, transportation expenses always increase the acquisition cost. In the case of sales, it depends on who sells; however, it would affect the acquisition cost in some way. We only have to account for it if:

• It is an expense from the client and we facilitate it (sales of diverse revenues).
• It is an expense of the selling company and it is made by a third party (transport expenses).

Adjustments to Acquisition Cost

Increase the acquisition cost if improvements are made in the production capacity, its economic life, or the use value to the company. Conversely, decrease the acquisition cost when there are depreciations (irreversible) and/or impairments (reversible).