The accounting process for office or store supplies is similar to the procedure followed for prepaid or unexpired expenses. Specifically, they are initially recorded as assets by debiting the office or store supplies account and crediting the cash account.

At the end of the accounting period, the cost of supplies used during the period becomes an expense and an adjusting entry is made. Without this adjusting entry, the income statement will show higher income and the balance sheet will show supplies that do not exist.

Accounting Process for Supplies

Entry at the Time of Purchasing Supplies

When supplies are purchased, they are recorded by debiting supplies and crediting cash. The journal entry is given below.
Time of Purchasing Supplies Entry

Adjusting Entry at the End of Accounting Period

At the end of the accounting period, the cost of the supplies used during the period is computed and an adjusting entry is made to record the supplies expense. This entry is made as follows:
Adjusting Entry at the End of Accounting Period

Example

The Green Company purchased office supplies costing $500 on 1 January 2016. Out of this, supplies costing $150 remained unused on 31 December 2016.

Required: In the company’s books:

  1. Make a journal entry on 1 January 2016, when the office supplies are purchased
  2. Make an adjusting entry on 31 December 2016 to record the supplies expense

Solution

1. When supplies are purchased
Journal Entry for Supplies Purchased
2. When cost of supplies used is recorded as supplies expense
Adjusting Entry Solution
Supplies expense for the period = $500 – $150 = $350

Frequently Asked Questions

What is the purpose of adjusting entry at the end of accounting period?

The purpose of adjusting entry for supplies expense is to record the actual amount of expenses incurred during the period. The supplies expense figure computed on 31 december is not correct since it doesn't take into account the supplies that were consumed and therefore used up in 2016. As a result, the ending inventory figure for supplies appears to be correct, but it is not. Hence an adjusting entry is required to record the correct amount of supplies expense for 2016.

When does the entry need to be made?

The journal entry will be made at the end of each accounting period as usage or consumption occurs and corresponding expenses are verified.

How is the adjusting entry recorded?

The adjusting entry needs to be recorded by debiting supplies expense and crediting cash. The credit (reduction in the asset) is necessary because office supplies are consumed during the period and will become an expense when used up.

Why do we debit supplies expense account instead of crediting cash?

The debit to supplies expense account is necessary because the supplies are consumed during the period, so they must be expensed. Expenses are not paid with cash, but rather recorded in journal entries. If we credit cash, then both assets and expenses will increase by $500.

How do you record an adjusting entry for prepaid expenses?

Prepaid expenses are not related to supplies. It is necessary to record an adjusting entry at the end of each accounting period for both prepaid expenses and unexpired costs. The debit for prepaid expense will reduce cash or, if you have more than one asset account with this name, then it will reduce either prepaid rent or prepaid insurance (assuming that these are the only two accounts you have with that name).

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