Accounting Question

Hi,

In my accounting software, my purchase of inventory items only show up as an expense AFTER these items are sold to a customer. Any inventory items that aren't yet sold, are showed as an asset. I asked a few people who told me that is how accounting works, purchase of inventory is only an expense AFTER it is sold. Does anyone know if this is true (I'm based out of New York - just in case the laws differ on the location of the business).

 

So are you saying if you buy something like, a product or materials for a company it's only an expense after a sale is made? Sorry, the questions is just a little confusing for me. Where I'm from If I buy something it becomes a business expense right away.

Maybe I read the question wrong?

 

Yep, your reading the question right. I was told by several people when it comes to inventory which I buy to sell, it is only an expense after the product is sold to the customer. Before the sale, it is considered an asset and not an expense. However this only applies to inventory which is bought to be sold. Other things, like rent, etc. become an expense when I pay for them.

 

Oh ok I see. With me, I only work with affiliates so I'm not purchasing products etc. On the other hand my girlfriend has a small online biz and she imports products from Alibaba for resale. As far as I know when she buys the products it's classed as an expense right away. Only things that would be classed as an asset for her would be things like the computer and if she bought a car through the business it would be an asset until sold if she ever sold it.

That's how it works from where I'm from anyways

 

The reason that the purchase is not accounted for as an expense at that time is because the assets of the company have simply been exchanged from cash to a physical product. It could actually be an investment if you purchased, for example, some gold bullion. You can only realize a loss or gain from the purchase/investment you made when the value of the physical asset has been determined (i.e., it has been sold for a price.) Then you can calculate the expense versus the asset's value and determine a loss or gain.

 

In my country this can be determined two ways - if it's commodity with a limited shelf-life, it can be expensed immediately (you basically use the purchase price, add taxes etc.). If it's not something that diminishes in value, you can have it as inventory / assets - it also depends a bit on what the items are - if it's parts for manufacturing finished products that you then sell, for instance, you already have a sale price, and you can expense the items immediately, since they will go directly to produce an item (I'm talking here about items that have a steady sale, or is already sold). It can be a bit confusing, but how you control this is mostly just about how you do your books - both ways is acceptable, however you still need to cater for the value of the inventory (for taxes, company stats etc.)

 

Inventory is an asset, it is never an expense.

When you sell the product, it is not an expense, it is a "cost of good sold" and is deducted from the sale price to determine your gross profit. You do not list purchases of inventory in the expense section of your income statement.

You should by a book about accounting, you will learn much better than trying to read help files in your software.