Two words appear all the time in accounting: purchases and sales. They mean something narrower than in everyday speech.
In ordinary talk you might say you “made a purchase” when you buy lunch. In accounting, these two words are kept for something more specific.
Using them as technical terms from the start is a very useful habit. Almost every later topic, including the trading account, gross profit, inventory and cost of sales, depends on using them correctly.
Sales: the goods the business sells
In accounting, sales (or revenue) usually means the income from selling the goods the business normally trades in. A shop that sells shoes records the money from selling shoes as sales. If that shop sold an old delivery van, that would not be sales, because it is not the business’s normal trade.
The test is: does the business exist to sell this? A bakery exists to sell bread and cakes, so money from bread and cakes is sales. If the same bakery charges a neighbour a small fee to use its car park, that is real income but not sales.
It is other income (sometimes called sundry income) and is recorded separately. Keeping the two apart matters. Sales is the headline figure the owner, the bank and a future buyer use to judge how well the core business is trading.
Purchases: the goods bought to sell again
Purchases means goods the business buys in order to sell them again (or to turn into products to sell). The shoe shop’s purchases are the shoes it buys from suppliers. Buying a new computer for the office is not purchases, because the business will not sell it. It is an expense or an asset instead.
A manufacturer that buys flour, sugar and butter to make cakes also counts those as purchases, because they become the goods to be sold. So “purchases” covers goods bought ready to resell and raw materials bought to be made into products.
It never covers anything the business buys to keep and use, such as ovens, shop fittings, a delivery van or the electricity bill. Those are assets or expenses.
A worked example
Imagine a small clothing stall (invented for teaching). In one month it buys 200 shirts from a supplier at RM20 each, so its purchases are RM4,000.
During the month it sells 150 of those shirts at RM35 each, so its sales are RM5,250. It also pays RM600 for stall rent and RM250 for a new display rail.
Only the RM4,000 goes into purchases, and only the RM5,250 goes into sales. The RM600 rent is an expense. The RM250 rail is a non-current asset the stall will keep and use.
Not all 200 shirts were sold. The 50 left over are closing inventory worth RM1,000 (50 × RM20).
That is why purchases alone do not equal cost of sales. We start with purchases, then adjust for the goods still unsold. Real prices and margins vary from business to business.
Why the distinction matters
Sales and purchases feed directly into gross profit:
Gross profit = Sales − Cost of sales (which is based on purchases and inventory)
If everyday spending got mixed in with “purchases”, the gross profit would be wrong. Keeping purchases to goods for resale keeps the profit calculation meaningful.
Using the figures above, the cost of the shirts actually sold is RM4,000 − RM1,000 = RM3,000. Gross profit is RM5,250 − RM3,000 = RM2,250. If the RM250 display rail had wrongly gone into purchases, profit would look RM250 too small, and every decision based on it would start from a false number.
Common confusions
- “I bought it, so it must be purchases.” Not so. Buying stationery for the office is an expense. Buying a machine is an asset. Only goods bought to sell again are purchases.
- “Any money coming in is sales.” Not so. A bank loan brings money in but is not sales. Selling an old asset brings money in but is not sales either.
- Purchases is not the same as “cost of sales”. Purchases is what you bought in the period. Cost of sales is what you sold, after adjusting for opening and closing inventory.
- Returns exist too. Goods sent back to a supplier are purchases returns. Goods customers send back are sales returns. They reduce the relevant figure and are not new categories.
How this fits the bigger picture
Sales and purchases are the first two lines you meet when building a trading account, which is the top part of an income statement. Getting them right feeds into cost of sales, then gross profit, then, after expenses, profit for the year.
They also link to cash versus credit. A sale can be for cash now or on credit (creating a debtor), and a purchase can be paid at once or on credit (creating a creditor).
The word stays the same whether or not money has changed hands yet. What changes is the second side of the record.
A quick check
Ask two questions of any item.
- Is it the goods the business normally trades in?
- Is it being bought to sell again, or sold as part of normal trade?
If yes, it belongs in purchases or sales. If no, it is something else: an expense, an asset or other income.
Try it yourself
Exercise: A stationery shop (a) buys pens from a supplier to sell, (b) sells pens to customers, and (c) buys a new shelf for the shop. Which is purchases, which is sales, and which is neither?
Show the answer
- (a) Buying pens to sell → purchases.
- (b) Selling pens → sales.
- (c) Buying a shelf → neither: it is a non-current asset the shop will use, not sell.
Next, see how these fit together in a simple income statement.
If you want these basics set firmly before the full IGCSE Accounting course begins, one of our teachers can help. We sort a page of everyday items into purchases, sales, expenses and assets with you. Book a trial class.