Is supplies expense debit or credit? Supplies are incidental items that are purchased with the expectation to be consumed in the near future. When accounting for supplies, the normal approach is to charge them to expense. That is, when you buy supplies for your business, you record the cost in your supplies account. As these supplies are used, they become an expense that must be reported on the income statement as supplies expense.
Therefore, you have to make an adjusting entry to your general ledger to reflect the value of the supplies used in the current period. The balance in your supplies account at the end of the process should equal the value of the supplies you have left on hand, and the amount posted to the supplies expense account will equal the cost of the supplies used.
Generally, supplies are reported as a current asset on the balance sheet until the point at which they’re used. Once they are used, supplies are converted to an expense that is recorded on the income statement. Hence, supplies expense is an expense account and so will have a debit balance. In this article, we will discuss supplies expense, debit, and credit as well as the journal entries for supplies expense as a debit.
Related: Decrease in accounts payable debit or credit?
What is supplies expense in accounting?
Supplies expense is the cost of consumables that are used during a reporting period. Supply purchases include any item that your business regularly uses, such as office supplies like pen paper, printing supplies, light bulbs, toilet tissue, etc. Purchasing supplies in bulk affects both the balance sheet and income statement. This is because the cost of supplies used during an accounting period becomes an expense at the end of an accounting period. Hence, adjusting entries are made at the end of each accounting period to ensure supply accounts accurately reflect the supplies on hand and the supplies used during the month.
Supplies expenses can be one of the larger corporate expenses depending on the type of business. In business, there are two types of supplies that may be charged to expense, which are office supplies expense and factory supplies expense. Office supplies include items such as paper, toner cartridges, and writing instruments. These supplies are usually of low cost that they are charged to expense as incurred. That is if the office supplies have a very low or insignificant cost they are charged to the supplies expense account when purchased rather than waiting till they are used to charge them to expense.
However, some organizations under the accrual basis of accounting record unused office supplies in an asset account, such as Supplies on Hand, and then charge the items to expense as they are used. Nevertheless, the administrative effort needed to do so does not normally justify the increased level of accounting accuracy, and so is not recommended.
Factory supplies, on the other hand, include maintenance materials, janitorial supplies, and items that are considered incidental to the business’s production process. These supplies are usually charged to expense as incurred. Hence, the supplies expense account is included within the cost of goods sold category on the income statement.
Some organizations, under the accrual basis of accounting, record unused factory supplies in an asset account, such as Supplies on Hand, and then charge the items to expense as they are used. 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. Also, factory supplies may be included in an overhead cost pool and allocated to units produced.
Recording supplies expense in accounting
Recording the supplies expense in accounting for office or store supplies is similar to the accounting process that is followed for prepaid expenses. Just like with prepaid expenses, supplies are initially recorded as an asset and then when used are later recorded as an expense.
When supplies are purchased for a business, they record the expense in the business’s supplies account. As these supplies are used or consumed, they become an expense that must be reported on the income statement as supplies expense.
Hence, an adjusting entry must be made to the general ledger to reflect the value of the supplies used in the current period. The balance in the supplies account at the end of the process would equal the value of the supplies that the business has left on hand, and the amount posted to the supplies expense account will equal the cost of the supplies used.
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.
It is important to understand that this accounting process is only applicable to bulk supply purchases. This means that if you buy and use a supply such as a printer ink immediately, the generally accepted accounting principle of materiality considers the purchase insignificant. This principle, therefore, allows you to record the purchase of this office supply as an expense immediately.
Now, we know that the cost of supplies is recorded to an asset first and then later recorded to the supplies expense account. But when making this adjusting entry, is supplies expense a debit or credit entry? Supplies expense in accordance with the accounting debit and credit rules will be entered as a debit and not a credit. In order to understand this, let’s discuss debit and credit.
See also: Is Unearned Service Revenue a Debit or Credit?
Debit and credit explained
Every business transaction with monetary value has to be accounted for in a business’s accounting books. In order to record business transactions, the system of debit and credit is used to record each transaction through two different accounts. That is, whenever a business transaction is recorded, at least two accounts are always affected by a debit or credit entry.
In double-entry bookkeeping, the debit column is positioned on the left side of the ledger account while the credit column is positioned on the right side of a ledger account. A debit entry is considered to be an accounting entry that either increases an asset or expense account or decreases a liability or equity account. A credit entry, on the other hand, is said to be an accounting entry that increases either a liability or equity account or decreases an asset or expense account. This means that a debit entry will increase the balance of an expense account like supplies expense, while a credit entry will decrease the balance of the supplies expense account.
For example, when you purchase office supplies, you pay cash for the office supplies. In order to record this, you credit the Cash account (which is an asset account), this will cause the Cash account balance to decrease. You have to also debit the Office supplies account (also an asset account), which will increase the balance in the account. Then later on, when making an adjusting entry to record the office supplies used, you debit the Office supplies expense account and credit the Office supplies account. As seen, the Office supplies expense account as an expense is debited to increase it and the Office supplies account as an asset is credited to reduce it.
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. However, we will discuss this further with journal entries examples.
Related: Is Depreciation Expense Debit or Credit?
Is supplies expense debit or credit?
Supplies expense is a debit and not a credit. The cost of supplies is initially recorded as an asset by debiting the office or store supplies account and crediting the cash 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.
Hence, under the accrual basis of accounting, the Supplies Expense account reports the number of supplies that were used during the time interval indicated in the heading of the income statement. Then, the Supplies or Supplies on Hand account which is a current asset account on the balance sheet reports the supplies that are on hand (unused) as of the balance sheet date.
As earlier said when recording the cost of supplies in the supplies expense account, it is recorded as a debit, and a credit entry is made to the Cash account (if paid for with cash) or to the accounts payable account (if supplies were purchased on account), using the journal entry below:
Debit and credit journal entry for supplies expense (when the cost of supplies purchased is insignificant)
|Accounts payable/Cash account||00|
If the cost of the supplies that the business has purchased and not yet consumed is significant, then this cost of supplies should be recorded instead as an asset. By using this approach, the supplies will appear on the business’s balance sheet as a current asset, and the journal entry would be:
Debit and credit journal entry for supplies on hand (when the cost of supplies purchased is significant)
|Supplies on hand||00|
|Accounts payable/Cash account||00|
These supplies appear on the balance sheet as supplies on hand until they have been used and charged to expense. That is, consuming supplies converts the supplies on hand asset into an expense, which is recorded using this entry:
Adjusting debit and credit journal entry to record supplies expense (when supplies have been used)
|Supplies on hand||00|
Conclusively, in as much as it seems ideal to record supplies as an asset, it is generally much easier to record them as an expense as soon as they are purchased. This will avoid tracking the amount and cost of supplies on hand. Though, this can only be applicable to the insignificant costs of supplies, not bulk supplies. Charging supplies to expense allows room for the avoidance of the fees charged by external auditors who would want to audit the supplies on hand asset accounts.
See also: Drawings Debit or Credit?
Is supplies expense a debit or credit? (examples)
When an organization purchases supplies, it must enter the full cost in its accounting records. Over time, the supplies are either used or discarded. 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 cost of supplies is initially recorded as an asset by debiting the office or store supplies account and crediting the cash account. Then, at the end of the accounting period, the supplies expense is recorded as a debit to show the cost of supplies used during the accounting 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.
Here are some examples of supplies expense as a debit and not a credit:
Journal entries for supplies expense (supplies used in manufacturing)
Tracking the costs of every item, nail, or screw used on the production line could be expensive and time-consuming. Therefore, you account for boxes of supplies as they are requisitioned from the warehouse.
For instance, if four boxes of nails costing $100 each are required for a production run. The accounting entry to record this would be to debit the Manufacturing overhead or Factory overhead account for the total amount of $400 and a credit to the Supplies account- nails for the $400. That is:
|Supplies account: nails||$400|
If there are unopened boxes of supplies remaining after all units are produced, these boxes can be returned to the warehouse for future use. The opened or partially full boxes are normally kept on the production line for use in another manufacturing run.
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 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. So some may just include factory supplies in an overhead cost pool and allocated to units produced.
For example, if two unopened boxes of nails costing $100 each are returned to the warehouse. The adjusting entry is to debit the Supplies account- nails for the total amount of $200 and credit Factory overhead with the $200. That is:
|Supplies account: nails||$200|
Journal entries for supplies expense on discarded and obsolete supplies
When a business first purchases supplies, the transaction can be entered as a debit to prepaid supplies expense and as a credit to supplies expense. If these supplies are left unused for too long, they may become damaged or obsolete. Therefore, an adjusting entry is required, if not the value of the supplies account will be overstated on the balance sheet.
For example, a company buys a new computer system that is worth $500. Instantly, the value of the old computer becomes obsolete. The adjusting entry to write off the obsolete computer will be:
An adjusting debit and credit journal entry for supplies expense to write off the obsolete computer
|Supplies expense: computer||$500|
|Prepaid supplies expense||$500|
Journal entries for supplies expense on monthly supplies adjusting entry
At the end of each month, a business can take a physical inventory of its supplies to update the account balance. The adjusting entry will be the difference between the beginning balance in the supplies account and the actual supplies remaining.
Supplies is a balance sheet account, whereas supplies expense is an income statement account. This justifies the rule that each adjusting entry will contain a balance sheet account and an income statement account. This adjusting entry will cause the credit entry made to supplies to decrease the total assets on the balance sheet while the debit entry made to supplies expense will increase the overall expenses on the income statement, which in turn reduces net income.
Let’s look at an example to illustrate the monthly supplies adjusting entry:
Company ABC made the following office supplies purchases in October 2022:
- File folders
The total of these office supplies purchases amounts to $5,000 and would be recorded in the company’s accounting software or manually in its general ledger like this:
However, if these supplies were purchased on account, the company will have to first record the purchases in accounts payable:
At the end of the month, the beginning balance will be $5,000. If Company ABC has $4,000 worth of supplies on hand, it means the company has used $1,000 worth of supplies during the month.
This would be the adjusting entry:
Debit and credit journal entry for supplies expense to recognize supply usage for October
Hence, the ending balance in the supplies account would be $4,000.
Journal entries for supplies expense at end of an accounting period
Similar to what was shown in the preceding 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.
For example, Company XYZ purchased office supplies costing $1500 on 1st January 2022. Out of this, about $500 cost of supplies remained unused on 31st December 2022. This means the Supplies expense for the accounting period would be; $1500 – $500 = $1000.
The journal entry on 1st January 2022, when the office supplies are purchased would be:
An adjusting entry on 31st December 2022 to record the supplies expense would be:
Debit and credit journal entry for supplies expense to recognize supplies usage for the accounting period
In conclusion, the cost of supplies should be recorded as an asset initially as a debit to the supplies account and a credit to the cash or accounts payable account. Then, as the cost of supplies used during the accounting period becomes an expense, an adjusting entry should be made at the end of the accounting period 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.
See also: Is Merchandise Inventory Debit or Credit?
Is supplies expense debit or credit?- Video
- Vertical integration benefits - May 25, 2023
- Bank Service Charge Journal Entry - May 19, 2023
- Tangible Book Value: Formula and Calculation - May 19, 2023