What Is Purchase In Accounting?
Definition: Purchase in accounting refers to the taking control of a given item or service by paying a set amount of money. Conversely, it is the exchange of money for a particular good or service. The process is usually undertaken by individuals or corporations in need of items or services.
Purchase enables the transfer of ownership of physical items or property as well as intellectual, between a buyer and seller. Upon purchase, the buyer has the right to use the item as they wish or dispose of them in the best way they see fit.
Being financial transactions, a purchase can be made either, on cash or credit. Similarly, a company or an individual can pay the full amount to gain ownership of a given item. In this case, ownership is usually transferred immediately or at a future agreed time.
Purchasing on credit can also result in full ownership transfer. However, in some cases, the seller might hold on to the item until the item is paid in full.
Steps in the Purchase Process
In small businesses, the purchase process usually follows a simple process such as a business owner placing an order for various items with vendors, without following spelled out procedures. However, in government departments or companies with many departments, the purchase process on its own is a complex process.
In most companies, departments must fill purchase requisition forms for approval, for items required. In this example, department staff fill requisition forms and turn them in to their department heads for consideration and approval.
Department heads, on the other hand, countercheck everything and then hand over the purchase request to the finance team for consideration. It is the responsibility of the finance team to analyze the purchase request and place orders on behalf of departments if everything is in order.
Conversely, the finance department, as well as higher-ranking managers, can decline a given purchase request for one or more reasons. For instance, a purchase request can be turned down if a department has already exceeded its spending limit in a given accounting period. Similarly, a request can be turned down, if high ranking managers feel the purchase requests is not important at a given time
The purchase process involves the searching of qualified suppliers that can fulfill a buyer’s needs. The process also entails receiving and verifying purchase requisitions. Purchase departments must prepare and issue a request for proposal documents as well as evaluate supplier responses to RFPs.
The Role of Purchase Departments
- Purchase departments are responsible for locating suppliers capable of supplying items and services that meet set standards
- Purchase departments also ensure quality specifications are met before purchases are made
- Such department ensure a free stream of deliveries thus minimizing delays that could halt the production process
- Tasked with the responsibility of minimizing the amount of cash wasted in unnecessary inventory
Purchase Example
Purchases are an important process as it ensures the timely delivery of items needed to sustain core operations in a business or a company. Likewise, the entire process ensures that goods are purchased at reasonable prices, thus ensuring companies or businesses get the full value of their money.
Similarly, a purchasing department is important in any large organization, especially those engaged in manufacturing processes. Such departments ensure that all the necessary items are purchased on time, thus ensuring production and processing operations run smoothly.
Purchasing departments play an important role in curbing fraud incidences. Instead of department heads dealing with vendors directly, purchasing departments transact and purchase items on behalf of companies, thus ensuring full value for money on items purchased.
Summary
Purchase is simply the process of paying an item to take possession. Being a financial operation, goods, and services are exchanged for a given monetary consideration. The purchase process is a formal process that can be a simple process in small businesses or a complicated process involving various steps in large organizations or companies.