Definition of Purchases

Purchases refer to the process of obtaining goods, services, and raw materials necessary for business operations through negotiating with suppliers, entering into contracts, and managing commercial relationships. This process includes all activities from identifying needs and evaluating suppliers to receiving goods and making payments, aiming to achieve the optimal balance between quality, cost, and speed.

Basic Types of Purchases

Purchases vary according to the nature of the business and the purpose of use, with each type having different characteristics and administrative requirements:

• Direct Purchases: Include raw materials and components that directly enter into manufacturing the final product or providing the core service
• Indirect Purchases: Support operational processes without being part of the final product, such as office supplies, safety equipment, and cleaning services
• Capital Purchases: Long-term investments in fixed assets such as equipment, machinery, and buildings that are used for several years
• Operational Purchases: Daily and monthly operational needs such as fuel, electricity, maintenance, and professional services

Practical Example of Purchases

A food manufacturing company in Riyadh conducts the following purchases:

Date: 20/6/2025

• Direct Purchases: Flour and sugar worth SAR 45,000 monthly
• Indirect Purchases: Cleaning and sterilization materials worth SAR 8,000 monthly
• Capital Purchases: New production line worth SAR 800,000 every 10 years
• Operational Purchases: Electricity and gas worth SAR 12,000 monthly

Importance in Business Operations

Purchases play a vital role in the success of any business entity and affect multiple aspects of performance:

• Impact on Costs: Purchases represent a large percentage of total costs for most companies, so managing them efficiently directly affects profitability and competitiveness
• Ensuring Product Quality: Selecting reliable suppliers and high-quality materials ensures final product quality and customer satisfaction
• Business Continuity: Good purchase planning ensures availability of necessary materials at the right time without interruption in production or services
• Legal Compliance: Meeting requirements of the Zakat, Tax and Customs Authority in the Kingdom of Saudi Arabia and adhering to quality and safety standards

Accounting Treatment of Purchases

Purchases are recorded in accounting records in different ways according to their type and intended use:

• Merchandise Purchases: Recorded in the purchases account or merchandise inventory according to the inventory system being followed
• Raw Materials: Recorded in the raw materials inventory account for manufacturing companies
• Fixed Assets: Recorded as assets on the balance sheet and depreciated over their productive life
• Operating Expenses: Recorded directly in expense accounts on the income statement

Basic Purchase Cycle

The purchasing process goes through sequential stages that ensure obtaining the best possible value:

1. Needs Identification

Analyzing actual requirements for materials and services while determining specifications, quantities, and timing

2. Research and Evaluation

Exploring the market to find the best suppliers and evaluating them based on quality, price, and reliability criteria

3. Negotiation and Contracts

Negotiating prices and terms and entering into contracts that achieve the best value for the company

4. Follow-up and Receipt

Monitoring the execution of purchase orders and ensuring delivery on time and with the required specifications

Common Challenges in Purchasing

Purchase management faces multiple challenges in the contemporary business environment, especially with the complexity of global markets and evolving quality and compliance requirements. These challenges require advanced management strategies and innovative solutions to ensure operational efficiency and business continuity. The most prominent of these challenges include:

• Managing Price Fluctuations: Especially for raw materials and basic commodities that are affected by global market conditions
• Ensuring Supplier Quality: Selecting and managing reliable suppliers who adhere to the required standards
• Balancing Cost and Quality: Achieving the best value without sacrificing quality or service
• Regulatory Compliance: Ensuring adherence to all local and international legal and regulatory requirements