Accounting for purchases in an expense account

Choosing an expense account for a purchase transaction first involves making a number of trade-offs.

No company will be able to create an account by type of operation. On the other hand, all operations can be classified in accounting with a certain logic. This logic in principle allows the reader of the accounts to find their way around.

Choosing your expense account requires asking yourself a number of questions. The first of these questions concerns the concept of charges itself. The following questions will depend on the activity of the company and its organization.

What is an accounting charge?

The concept of charges is not really defined by the general chart of accounts or PCG, which is satisfied with a heterogeneous enumeration in article 511-2 of the PCG.

The charges include:

Choosing an expense account requires asking questions

The questions relating to the choice of an expense account that we have been given to read generally show that the reflection stops at browsing the list of accounts in the general chart of accounts. If the account does not have the same title as the designation of an asset on the invoice, the novice accountant cannot find the answer.

However, there is no specific account for all possible and imaginable goods. No account in the chart of accounts is called "Flowers" or "chair". It is therefore necessary to go further, by using the principles of the general chart of accounts.

The choice of an expense account must be the result of a reflection which will be done taking into account:

Choose your expense account using the notions of operating and exceptional expenses

Knowing how to distinguish operating expenses from financial and exceptional expenses

Financial charges generally do not pose any particular problem since they arise from the company's external financing.

On the other hand, the distinction between operating expenses and exceptional expenses is often more difficult to understand.

In an article in the French journal of accounting, an author Louis Klee ¹ proposed to distinguish:

The operating result was limited to the normal current result.

Subsequently, a recommendation from the order of chartered accountants ² made the choice to distinguish the current result from the so-called extraordinary result. This position was taken up in a white paper ³ .

All elements which do not fall within ordinary activities, are of an unusual nature and of an exceptional occurrence, ie which have a strong chance of not reoccurring in the future, come under the extraordinary result here. The two conditions are here cumulative.

Losses that concern a company's customers, even for very large amounts, will come under current income when the two conditions are not met (unusual nature and exceptional occurrence).

This definition makes it possible to consider that penalties and fines most often come under exceptional charges, except when they become systematic. They are then recognized as current or financial expenses depending on their nature.

These definitions show that expenses are not exceptional in nature and that the assessment can also be made according to the particular situation of the company.

Choose your expense account taking into account the activity of the company

The activity of the company is also important when it comes to charging an expense to a specific account. The distinction between trading or commercial enterprises and industrial enterprises is very clearly reflected in the accounts.

Choose your expense account taking into account the activity of the company

Distinguish raw materials from goods according to the activity of the company

This is the whole distinction between the 601,000 and 607,000 accounts but also between the corresponding product accounts (701,000 and 707,000, sales of finished products and sales of goods).

Thus, a trading company can sell goods (it buys to resell) while for its customer, it will be raw materials (used in the manufacture of its product).

Depending on whether the company buys to resell without any transformation or whether it transforms the purchased goods and resells a finished product, the recognition will not be the same. But the same company can perfectly combine the two activities. It will then use several accounts.

There is thus a parallelism between the income and expense accounts even if the "mirror" is not systematic:

The same good purchased by two different companies will therefore be charged differently. This distinction even makes it possible to go further since in the same company, a good can be a commodity or a raw material depending on the use made of it.

Finally, a company can change the qualification of a purchase along the way. Goods counted as raw materials may become goods if they are resold as is.

Example

A company can buy windshields intended to be mounted on its vehicles (finished product) and resell them as is, without assembly (goods).

Distinguish between purchases (60) and external charges (61/62)

These external expenses are also sometimes called general expenses and include a very heterogeneous set of expenses.

By way of example and out of order with respect to the general chart of accounts, we can cite:

Unlike purchases, whose account number begins with 60, these costs do not enter directly into the production process.

Outsourcing may or may not be part of the operating cycle

Here again, a distinction can be made taking into account the activity of the company. Expenses that enter directly into the production process, such as custom work or services that will be directly re-invoiced to the customer by a service provider, will be recorded in accounts 604 (purchase of studies and services) or 605 (purchase materials, equipment, works).

In other cases, account 611, general subcontracting, will most often be used.

Example

A consultant uses another consultant for one of his clients to whom he re-invoices the service. The service of the second consultant is not an external charge to be accounted for in fees. It is an element of its operating cycle, which can be counted in account 604000.

Choose your expense account taking into account the organization of the company: stocks

This last distinction makes it possible to take into account the company's stocked and non-stocked purchases. Accounts 602 and 606 can be subdivided in the same way.

Thus, depending on whether or not the company keeps a stock sheet for its purchases, the root of the accounts may change. The general chart of accounts distinguishes in this case, the accounts whose number begins with 602 (stocked purchases), from those whose number begins with 606 (non-stocked purchases).

Distinguish stocked purchases from non-stocked purchases and create the necessary subdivisions

A subdivision of account 606 will often make it possible to record as expenses, non-significant items (definition of the PCG) or low-value goods resulting from tax tolerance (less than €500 excluding tax), which would fall within the definition of a asset (see here for the distinction between assets and expenses) if their cost was higher.

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