Difference Between Purchases for Resale & Expenses
Often many new business owners lack a basic knowledge of accounting which is essential for any company to succeed. There are two different ways that money flows out of businesses – purchases for resale & expenses. Many business owners don’t know how to account for these so we have explained them in this post.
What are purchases for resale?
Purchases for resale are the direct costs attributed to the production of goods sold by a business. Included in this is the cost of buying stock for resale or the cost of buying materials for the production of goods.
What are expenses?
Expenses are all the indirect costs of running a business for example light, rent, stationary, motor expenses and many more.
How do I account for purchases for resale?
Purchases for resale are mostly done on a credit basis and so the supplier will issue you an invoice. The money spent on purchases will end up as withdrawals from your bank account. Once all debts you owe are paid, your purchases should equal your withdrawals from your bank.
How do I account for expenses?
Expenses are normally paid straight out of a business’s bank account as they fall due for payment. Seeing as these expenses are paid out of your bank account, your accounts will no longer balance. To solve this you must record these payments for all of your indirect accounts in your expenses accounts. The sum of individual expenses accounts will give you your expenses figure.
If you are still confused about purchases for resale & expenses or want a better explanation of these terms then you should check out our five part video training series. This series called Account-Ability consists of short videos covering the basics of accounting.