Supplies expense is what type of account? Supplies are incidental items that companies purchase to use in the near future. When accounting for the supplies purchased, the normal approach is to charge them to expense. This means that when companies buy supplies for their business, they record the cost in their supplies account on the balance sheet. Over time, as these supplies are used, they become an expense and are then reported as supplies expenses on the income statement. Hence, supplies expense is a type of expense account.
Related: Notes receivable debit or credit?
What is supplies expense?
Supplies expense is the cost of the incidental items and consumables that are used during an accounting reporting period. Supplies purchased include any item that a business regularly uses, such as office supplies like printing supplies, pens, paper, light bulbs, toilet tissue, etc.
In business, office supplies expense and factory supplies expense are two types of supplies that may be charged to expense. Office supplies include incidental items such as paper, toner cartridges, pens, and printer ink. Other examples of office supplies include envelopes, organizers, tape, staplers, staples, paper clips, paper shredders, etc.
Most of these supplies are usually of low cost and as such are recorded in the supplies expense account as they are purchased. That is, if the cost of the office supplies is very low or insignificant, they are charged to the supplies expense account when purchased rather than waiting till they are used, to charge them to expense. However, some companies under the accrual basis of accounting report unused office supplies in an asset account, such as Supplies on Hand, and as the items are used, they are then charged to expense.
Factory supplies, on the other hand, include janitorial supplies, maintenance materials, solvents, machine lubricants, rags, and other items that are considered incidental to the company’s production process. These supplies are usually charged to expense as incurred and as such the supplies expense is included within the cost of goods sold category on the income statement.
Some companies, under the accrual basis of accounting, record unused factory supplies in the Supplies on Hand asset account 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 reserved in storage because someone must manually count the quantities on hand. In addition, factory supplies may also be included in an overhead cost pool and allocated to the units produced.
See also: Service revenue is what type of account?
Supplies expense is what type of account?
Supplies expense is a type of expense account that reports the cost of supplies used during an accounting period. The bulk purchase of supplies affects the balance sheet and income statement. This is because the cost of supplies is first reported as an asset on the balance sheet. Then, the cost of supplies used during an accounting period is reported as expenses in the income statement. Hence, at the end of each accounting period, adjusting entries are made to ensure the supply accounts accurately reflect the supplies on hand and the supplies expense account accurately reflects the supplies used during the period.
Supplies expense is an expense account that can be one of the larger corporate expenses depending on the type of business. For certain kinds of companies, office supplies make up a significant percentage of expenses. For example, a firm that does all of its operations from a large office must order supplies frequently to support the office-based workforce. It is therefore crucial to keep track of these costs in order to create regular financial reports, such as the income statement.
When accounting for supplies, the usual approach is to charge them to expense. This means that, when a firm buys supplies for its business, the cost is recorded in the supplies account initially. Then, as these supplies are used, they become an expense that is reported on the income statement as supplies expense. Therefore, the firm has to make an adjusting entry to its general ledger to reflect the value of the supplies used in the current period. This means that supplies expense is an expense account that reflects the cost of supplies used.
The balance in the firm’s supplies account at the end of the accounting period would equal the value of the supplies that the firm has left on hand, and the amount reported to the supplies expense account will equal the cost of the supplies used. In conclusion, the cost of supplies is reported as a current asset on the balance sheet until the point at which they’re used. Once they are used, the cost is converted to an expense that is recorded on the income statement.
See also: What type of Account is Sales Discounts?
Accounting for supplies expense
Like any other expense, a company must account for its costs of supply used on the income statement. A basic multiple-step income statement separates operating expenses from non-operating expenses. The operating expense section is then divided between selling and administrative costs. Supplies expense can be reported under administrative costs on the income statement. The resulting amount after accounting for all operating expenses and supplies is then the operating income for the accounting period.
Supplies expense as an expense account
As earlier said, supplies are treated as an asset when purchased and then become expenses once a business uses them. However, there is an exception whereby a company can treat supplies immediately as an expense rather than as current assets.
This happens when the value of the supplies is considered insignificant and would not make an impact on the business’s financial reports. In such instances, as the business makes supplies purchase, it can debit the Supplies Expense account to record the cost. This means that the supplies are immediately considered an expense from the time of purchase. That is:
|Supplies expense account||00|
Businesses can do this, in accordance with the accounting principle of materiality. The accounting principle of materiality states that an accounting standard can be ignored if doing so has an insignificant impact on the business’s financial statements, and doesn’t mislead anyone reading the business’s financial report. That is, under generally accepted accounting principles, a business does not have to follow an accounting standard if an item is immaterial.
Furthermore, according to guidelines set by the U.S. Securities and Exchange Commission in 1999, any item that represents five percent or more of a business’s total assets should be deemed material and listed separately on its balance sheet. Therefore, in the case of supplies, if the value of the supplies is significant enough to represent at least five percent of the business’s total assets, the firm should report it as a current asset on its balance sheet.
That being said, supplies can be considered a current asset if their dollar value is at least five percent of the business’s total assets. That is, if the cost is significant, businesses can record the value of unused supplies on their balance sheet in the asset account under Supplies. That is:
Then the business would record the supplies used during the accounting period on the income statement as Supplies Expense. The supplies expense is, therefore, reported as a debit. That is:
For instance, if a firm purchased office supplies that cost $1500 on the 1st of January 2022. The cost is significant, so the firm can record the value of supplies on its balance sheet in the asset account under Supplies. That is:
Say, by 31st December 2022, only about $500 worth of supplies remained unused from the purchase made on 1st Jan. This means that the Supplies expense (supplies used) for the accounting period would be; $1500 – $500 = $1000.
This means that at the end of the accounting period, the cost of supplies used during the period is an expense and as such an adjusting entry has to be made to the supplies expense account to record it. That is:
If this adjusting entry is not done, the company’s balance sheet will show supplies that are no longer in existence and the income statement will show higher income.
Related: What type of Account is Sales Returns and Allowances?
Supplies expense is what type of account? Supplies expense is the cost of the incidental items and consumables that are used during an accounting reporting period. Therefore, supplies expense is a type of expense account reported on the income statement. In double-entry bookkeeping, if the supplies purchased are insignificant and don’t need to be classified as a current asset, you record supplies by debiting the Supplies expense account and crediting the Cash account if you paid for the supplies in cash or crediting accounts payable if bought on account.
However, in a case whereby the cost of supplies is significant, it is initially recorded as an asset by debiting the office or store supplies account and then 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 the supplies expense account to record it.
Related: Unearned revenue is what type of account?
Supplies expense is what type of account?- Video
- Vertical integration benefits - May 25, 2023
- Bank Service Charge Journal Entry - May 19, 2023
- Tangible Book Value: Formula and Calculation - May 19, 2023