If you are selling a product, then the tracking of your inventory expenses are very important as this will probably be a primary expense for your business. Normally a purchase of inventory is also considered what is called Cost of Goods Sold. This phrase basically means what it says, the cost of the product that you sold. For example, you sell hair accessories and spend the following. $1.00 per piece and .50 cents for packaging. Therefore the cost of the goods you sold were $1.50 per piece. The inventory portion is the $1.00. The packaging is a Cost of Goods Sold expense.
The bookkeeping entry would be as follows. Debit Inventory Purchases for $1.00 packaging for .50, credit Bank Account (if paid thru bank).
But of course you would be buying in bulk so this number would be much higher.
Let’s say you are a used car dealer and buy cars at an auction to resell. You paid $1200 for an auto. The bookkeeping entry would be debit Auto Inventory and Credit to the Bank Account (if paid thru bank).
Next, what other costs are considered Cost of Goods Sold?
By Alamo Bookkeeping Associates