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. When supplies are purchased, they are recorded by debiting supplies and crediting cash. The journal entry is given below. 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: 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. When supplies are purchased 2. When cost of supplies used is recorded as supplies expense Supplies expense for the period = $500 - $150 = $350Accounting Process for Supplies
Entry at the Time of Purchasing Supplies
Adjusting Entry at the End of Accounting Period
Example
Solution
Adjusting Entry for Supplies Expense FAQs
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.
The journal entry will be made at the end of each accounting period as usage or consumption occurs and corresponding expenses are verified.
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.
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.
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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