Definition
A purchase refers to the act of acquiring a good or service by paying a certain amount of money. The purchase is distinct from other forms of acquisition, such as exchange, gift, or inheritance. Generally, the purchase price of an item serves as the original cost basis, which is the initial value used for tax purposes, determining capital gains, and depreciation.
Examples
- Real Estate Purchase: When buying a home, the amount paid during closing becomes the original cost basis of the property.
- Equipment Purchase: A business buying machinery for production records the purchase price as the original cost basis.
- Stock Purchase: When an investor buys shares of a company, the purchase price of those shares is used as the original cost basis for future capital gains calculations.
Frequently Asked Questions (FAQs)
1. What distinguishes a purchase from an exchange?
A purchase involves paying money to acquire a good or service, while an exchange involves trading one item of value for another.
2. How does the purchase price affect the original cost basis?
The purchase price is used as the original cost basis for the asset, which influences future calculations for capital gains, depreciation, and taxes.
3. Can the purchase price of an asset change?
Typically, the purchase price is fixed at the time of acquisition. However, adjustments can be made due to additional costs such as installation fees or improvements.
4. Why is the original cost basis important?
The original cost basis determines the taxable amount when the asset is sold. It affects capital gains calculations, depreciation schedules, and determining tax liabilities.
5. What types of purchases are typically relevant in accounting?
Relevant purchases in accounting include real estate, inventory, equipment, and financial securities.
Related Terms
- Exchange: The act of trading one item or service for another without the use of money. The value can be subjective and mutually agreed upon.
- Gift: The transfer of ownership of an asset without the expectation of payment. Gifts often have different tax implications compared to purchases.
- Inheritance: The acquisition of assets from someone following their death. Inherited assets may have stepped-up basis rules.
- Original Cost Basis: The value of an asset at the time of purchase, serving as the starting point for calculating depreciation and capital gains.
Online References
Suggested Books for Further Studies
- “Fundamentals of Financial Accounting” by Fred Phillips, Robert Libby, Patricia Libby
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
- “Tax Savvy for Small Business: A Complete Guide to Understanding Taxes and Business” by Frederick W. Daily
Fundamentals of Purchase: Accounting Basics Quiz
### What is a purchase in accounting terms?
- [x] An acquisition bought by paying a certain amount of money.
- [ ] An exchange of goods between two parties.
- [ ] A gift received without any payment.
- [ ] An inheritance received from a deceased relative.
> **Explanation:** A purchase involves the acquisition of goods or services through a monetary transaction.
### How is the original cost basis determined?
- [x] By the purchase price of the item.
- [ ] By the estimated value of the item.
- [ ] By the selling price of the item.
- [ ] By the appraised value of the item.
> **Explanation:** The original cost basis is determined by the purchase price at the time of acquisition.
### What influences the original cost basis of a real estate purchase?
- [x] The amount paid during closing.
- [ ] The property's estimated future value.
- [ ] Real estate market trends.
- [ ] Local property tax assessments.
> **Explanation:** The original cost basis of a real estate purchase is influenced by the total amount paid during the closing of the deal.
### What is distinct about a purchase compared to an exchange?
- [x] In a purchase, money is exchanged for an item.
- [ ] In a purchase, goods or services are exchanged equally.
- [ ] A purchase involves trading one asset for another.
- [ ] Both a purchase and an exchange involve no monetary transaction.
> **Explanation:** A purchase involves paying money to acquire goods or services, unlike an exchange.
### Can the purchase price of an asset include additional costs?
- [x] Yes, if they are related to installation or improvements.
- [ ] No, it includes only the sticker price.
- [ ] Only if related to sales tax.
- [ ] It never includes any additional costs.
> **Explanation:** The purchase price can include additional costs like installation fees or capital improvements.
### Why is the original cost basis important for tax purposes?
- [x] It affects how capital gains and depreciation are calculated.
- [ ] It determines the selling price of the property.
- [ ] It is used to estimate property taxes.
- [ ] It is irrelevant for tax purposes.
> **Explanation:** The original cost basis is crucial for determining taxable capital gains and depreciation schedules.
### How does the original cost basis affect depreciation?
- [x] It serves as the starting value for calculating depreciation.
- [ ] It is used to estimate future appreciation.
- [ ] Depreciation does not consider the original cost basis.
- [ ] It is irrelevant for calculating depreciation.
> **Explanation:** The original cost basis is used as the initial value in computing depreciation over time.
### Is an inheritance considered a purchase?
- [ ] Yes, because assets are acquired.
- [x] No, because it is received without paying for it.
- [ ] Sometimes, depending on the circumstances.
- [ ] Only if the inheritor pays inheritance tax.
> **Explanation:** Inheritance is not considered a purchase as it involves acquiring assets without a monetary transaction.
### What happens if you have to adjust the purchase price of an asset?
- [x] The original cost basis may change.
- [ ] The resale value remains the same.
- [ ] The depreciation schedule is unaffected.
- [ ] The tax liabilities remain consistent.
> **Explanation:** Adjustments to the purchase price, such as for installation or improvement costs, may change the original cost basis.
### Which type of transaction involves no monetary payment?
- [ ] Purchase
- [ ] Sale
- [ ] Lease
- [x] Gift
> **Explanation:** Gifts involve the transfer of ownership without receiving any payment in return.
Thank you for diving deep into understanding the intricacies of purchases. Keep exploring and learning!
