How to debit and credit the purchase of supplies? Like prepaid insurance, accrual accounting treats purchase of supplies initially as an asset. Supplies are a common type of prepaid expenses. 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 post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting tutorials, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.
Index of how to debit and credit tutorial
What are supplies in accounting?
Supplies, also called consumables, are recorded and reported as inventory, although they also can be considered as prepaid expenses. When a company purchases pens, paper, file folders, and ink cartridges for use in the office, and it is expected that they will not be used up entirely in the current accounting period, the purchase of such supplies should be recorded initially as an asset.
At the end of the period, an adjusting entry is made to record the cost of supplies used in the current period in the supplies expense account.
How to debit and credit the purchase of supplies?
On January 5, FAC purchases supplies of advertising materials from Metro Supply on credit. The supplies cost $2,500 and are estimated to fulfill the need for a 3-month starting from January.
Basic transaction analysis
The asset in the form of supplies of $2,500 arises. 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).
Accounting equation analysis
The accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.
In this illustration, the effects of the increase in Supplies and the increase in Accounts Payable can be shown in terms of the accounting equation as follows:
Debit-credit analysis
According to the debit-credit rule, the increase in assets is debited. Since the supplies is expected to be used over three months (more than the accounting period of one month), we treat the purchase of supplies as an asset. From the accounting point of view, the Supplies account is debited $2,500.
According to the debit-credit rule, the increase in liabilities is credited. The purchase of supplies on account means the incurring of a liability. Technically, the Accounts Payable is credited $2,500.
Journal entry
In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.
When the debit to the Supplies account is posted to the general ledger, the Supplies account will have a debit balance of $2,500.
How to debit and credit the adjusting entry for supplies and supplies expense?
Assume that a physical inventory count on January 31 reveals that the supplies costing $1,000 remains on hand. Therefore, the supplies used is $1,500 ($2,500 – $1,000). The use of supplies means the decrease in an asset, Supplies. The use of supplies also means the decrease in owner’s equity by increasing an expense account, Supplies Expense.
The effects of the adjustment to the Supplies and Supplies Expense accounts can be shown using the accounting equation as follow:
The adjusting entry for supplies expense at the end of January is illustrated as follows:
After all debits and credits are posted to the general ledger, the Supplies account will have a debit balance of $1,000 reflecting the cost of supplies on hand, whereas the Supplies Expense account will have a debit balance of $1,500 reflecting the use of supplies during January.
Accordingly, the Supplies of $1,000 will appear as an asset in the statement of financial position at January 31 and the Supplies Expense of $1,500 will be reported as an expense in the statement of profit or loss for the month of January.
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