Are Supplies a Current Asset? How to Classify Office Supplies on Financial Statements

An adjusting entry is made to return the unused boxes back to the supplies inventory. Some companies, record unused factory supplies in an asset account (Supplies on Hand), and then charge the items https://kelleysbookkeeping.com/ to expense as they are used. However, this is only cost-effective if a large number of factory supplies are retained in storage because someone must manually count the quantities on hand.

• Post the entry to your general ledger and verify the balance of the supplies account.
• We see from the adjusted trial balance that our revenue accounts have a credit balance.
• It will help the reader to understand the financial statement more easily.

The business would then record the supplies used during the accounting period on the income statement as Supplies Expense. For every transaction, the total amount of debits must equal the total amount of credits. This is very important because if they don’t have the same balance, the transaction would be unbalanced, and the business’s financial statements will be inherently incorrect. Now that we have an understanding of the debit and credit rules, it is evident why supplies expense is a debit and not a credit. The supplies on hand are therefore balance sheet assets that become income statement expenses as employees take and remove the supplies from the storage locker for use. So, at the end of each reporting period, the adjusting entries that are made transfer the supplies used from supplies on hand to the supplies expense account.

Then, at the end of the accounting period, the cost of supplies used during the accounting period becomes an expense and an adjusting entry is made to record the expense. If this adjusting entry is not done, the income statement will show higher income and the balance sheet will show supplies that do not exist. In conclusion, the cost of supplies is reported as a current asset on the balance sheet until the point at which they’re used.

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The adjusting entry will be the difference between the beginning balance in the supplies account and the actual supplies remaining. When an organization purchases supplies, it must enter the full cost in its accounting records. If the organization or business uses the accrual method of accounting, it must make an adjusting entry that reflects the actual amount of supplies that it has on hand. The company decided to record to expense directly to prevent any complications of the entry. The company does not expect to have office supplies remaining at the month’s end. Even if it is not the right approach, it can be used as the impact on the financial statement is very low for some small entities.

• The inventory account, which is an asset account, is reduced (credited) by $55, since five journals were sold.
• Temporary accounts (or nominal accounts) include all of the revenue accounts, expense accounts, the owner’s drawing account, and the income summary account.
• Shipping supplies are the cartons, tape, shrink wrap, etc. for preparing products that are being shipped to customers.

Like prepaid insurance, accrual accounting treats purchase of supplies initially as an asset. An adjusting entry is required at the end of the accounting period to report the supplies expense in the financial statement that reflects the use of supplies during the period. This helps to keep the balance sheet supplies account from being overstated and the business’s knowledge about its current assets accurate. A business can then make adjusting entries when there is a need to update the supplies account balance or before the business’s monthly or annual financial statements are prepared. Factory supplies, on the other hand, include maintenance materials, janitorial supplies, and items that are considered incidental to the business’s production process. Hence, the supplies expense account is included within the cost of goods sold category on the income statement.

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Cash is increased with a debit, and the credit decreases accounts receivable. The balance sheet formula remains in balance because assets are increased and decreased by the same dollar amount. Also, charging supplies to expense allows for the avoidance of the fees charged by external auditors who would otherwise want to audit the supplies on hand asset account.

Entry at the Time of Purchasing Supplies

When the company withdraws the items and uses them, we must reverse the office supplies to expense. Office supplies play an important role in both personal planning and business performance. Whether you are creating spreadsheets or filing documents, proper office supplies help you get everything done that much quicker and smarter.

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Office supplies are typically current assets on a company’s balance sheet and are expected to be consumed within one year. Office supply accounts for a relatively small portion of total current assets. Even the office supplies do not have long-term life, but they meet the definition of the current assets. https://quick-bookkeeping.net/ Take, for instance, a company paying $800 on the 1st of May for the month of May rent. Because cash was paid out, the asset account Cash will be credited and another account will have to be debited. Since the rent paid will be used up in the current month of May, it is considered to be an expense.

What are Debits and Credits?

To know whether you need to add a debit or a credit for a certain account, consult your bookkeeper. Debit always goes on the left side of your journal entry, and credit goes on the right. In double-entry bookkeeping, the left and right sides (debits and credits) must always stay in balance. The debit increases the equipment account, and the cash account is decreased with a credit. Asset accounts, including cash and equipment, are increased with a debit balance. When supplies are purchased, they are recorded by debiting supplies and crediting cash.

Rules of debit and credit

On the other hand, the liability in the form of Accounts Payable of $2,500 is incurred. The supplies purchase is entered to the accounting system as an asset since the benefit is anticipated to expand longer than the current accounting period (the month of January). Similar to what was shown in the preceding https://business-accounting.net/ example, at the end of an accounting period, the cost of the supplies used (supplies expense) during the period is computed and an adjusting entry is made to report it. Companies can record office supplies as expenses when they do not expect the supply to last more than one accounting period.

Businesses can do this, in accordance with the accounting principle of materiality. That is, under generally accepted accounting principles, a business does not have to follow an accounting standard if an item is immaterial. Although each account has a normal balance in practice it is possible for any account to have either a debit or a credit balance depending on the bookkeeping entries made. Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet. Shareholders’ equity is the net amount of your company’s total assets and liabilities.