Bookkeeping · Daily Workflows · Brief · Working level
Inventory purchases: asset first, expense when sold
Inventory you buy is an asset, not an expense — it becomes cost of goods sold only when the item sells. Here are the purchase and sale entries, and the periodic-versus-perpetual choice in small-business terms.
Inventory is the one purchase that is not an expense when you pay for it. Goods bought for resale sit on the balance sheet as an asset called Inventory, and their cost hits the profit and loss — as cost of goods sold (COGS) — only when the goods sell. Get that timing wrong and every month's gross margin is fiction.
The purchase entry
Buy 3,000 of goods for resale on supplier terms:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 3,000 | |
| Accounts payable | 3,000 |
No expense yet. Freight-in and duties belong in Inventory too — they are part of the cost of getting goods ready to sell.
Nothing on the P&L has moved. That is correct: you traded one asset position for a liability, and the goods are still yours to sell.
The sale — perpetual style
A perpetual system (any point-of-sale or ledger with item tracking) makes two entries at the moment of sale. Sell an item that cost 200 for 500:
| Account | Debit | Credit |
|---|---|---|
| Cash | 500 | |
| Sales revenue | 500 |
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | 200 | |
| Inventory | 200 |
Gross profit on the sale is visible immediately: 500 revenue less 200 COGS.
The sale — periodic style
A periodic system skips the cost-side entry during the year. Purchases accumulate, and COGS is computed at count time:
The periodic COGS formula, once per period:
| Component | Amount |
|---|---|
| Beginning inventory (last count) | 8,000 |
| Plus: purchases during the period | 26,000 |
| Less: ending inventory (this count) | (9,500) |
| Cost of goods sold | 24,500 |
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | 24,500 | |
| Inventory | 1,500 | |
| Purchases (clearing) | 26,000 |
Inventory moves from 8,000 to 9,500; the purchases account clears to zero.
Periodic is honest and cheap, but between counts your P&L shows no COGS and your gross margin is meaningless. If you sell physical goods and price on margin, count monthly or go perpetual.
Whichever method you run, the year-end count is non-negotiable — inventory is a required figure on the return, and Publication 538 covers the accounting-method side. See how the balance flows through to reporting in inventory on the financial statements, and make sure the count date lands inside your month-end close checklist.
What to do next
- Confirm purchases for resale post to the Inventory asset, not an expense.
- Pick your method: perpetual if your software tracks items, periodic with a monthly count if not.
- Schedule the year-end physical count now, and book the adjustment the same week.
Frequently asked questions
- Is buying inventory an expense?
- No. When a business buys inventory for resale, the purchase is recorded as an asset — debit Inventory, credit Cash or Accounts payable. The cost moves to the expense side only when the item sells, as cost of goods sold. Expensing purchases immediately overstates costs in buying months and understates them in selling months.
- What is the difference between periodic and perpetual inventory?
- Perpetual systems update the Inventory account and cost of goods sold with every sale, usually through point-of-sale software. Periodic systems record purchases during the year and compute cost of goods sold once, from a physical count: beginning inventory plus purchases minus ending inventory. Small businesses without item-level software typically run periodic.
- What is the journal entry when inventory sells?
- A perpetual sale needs two entries: debit Cash or Accounts receivable and credit Sales revenue for the price, then debit Cost of goods sold and credit Inventory for the item's cost. Under a periodic system, only the revenue entry is made at sale; cost of goods sold is booked at count time.