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
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