Adjusting Entries: Supplies - Online Tutor, Practice Problems & Exam Prep

Adjusting entries for supplies are classified as deferrals, similar to prepaid expenses. Supplies are considered assets, as they are owned by the company. When supplies are purchased, an asset account is debited, and cash is credited. At the end of the period, a count determines the remaining supplies, leading to an adjustment. If $800 worth of supplies is reduced to $200, a supplies expense of $600 is recorded by debiting supplies expense and crediting the supplies account. This ensures accurate financial reporting under accrual-basis accounting.

Adjusting Journal Entries: Supplies (Accrual Accounting Method)

Alright. Now let's discuss another type of adjusting entry, the adjusting entry for supplies. So remember, when we talked about adjusting entries, we had 3 types: deferrals, accruals, and depreciation. Well, the supplies adjusting entry is still a deferral. Okay. We talked about prepaid expenses before this, which were also a deferral. So let's talk about supplies. The supplies, this is what you would find in the supply office, you're going to see it's full of notepads, staples, paper clips, this and that, all sorts of stuff that get used in the day-to-day around the office, right? So you would imagine that we would have some balance in this supplies account. So what do you think? Pop quiz. Supplies are A, an expense B, a liability C, an asset or D, revenues. Yeah. Good. Very good. I'm assuming that you just said supplies are assets. I don't know how you know so much, but you're doing great. Alright? And if you didn't get that, let me explain to you real quick. So supplies are assets, right? Because these are things that we purchase. We purchase all these office supplies, these notepads and pens, and then we own them, right? And then we're going to use them up in our business. So since we own these supplies, they're an asset to the company. Okay? Cool. Pretty simple. So let's see how the supplies has to deal with adjusting entries here. Okay. So just like with prepaid expenses, supplies are going to have 2 important dates. Alright? And we're going to start here in the blue boxes, and then in the next video we'll talk about the cash basis to accrual basis in the red boxes. Okay. So let's start with the first important date. And you're gonna notice with pretty much every adjusting entry that we deal with, we're gonna be talking about 2 dates. Okay? So the first one is where we purchase the supplies. Right? So we pay for the supplies in advance. Right? The cash is happening before the expense. And we create the supplies account. Okay? So on November 1st, the company purchases $800 worth of office supplies. Okay? So the entry they would make, pretty straightforward. They would create supplies. Right? They would have an asset for supplies, and they would give it a debit of 800. Assets go up with a debit. So supplies now has a balance of $800, and we're going to credit cash for $800, right? We paid for it in cash, so we credit cash $800. Pretty straightforward there.

Now, let's think about the adjusting entry. So this is a little different from prepaid expenses. Prepaid expenses, we're thinking about the time that's passed and how much of the time we've used up. So we would lower the balance based on that. With supplies, we're going to adjust the supplies account based on the amount of supplies left at the end of the period. Okay? So this is different. What we're going to do is we're literally going to go at the end of the period. We're going to go into the supply closet and we're going to count. Okay. We've got this many notepads left, this many staplers, this much clipboards, this much paper or whatever. And we're going to basically do an inventory of the supplies closet and see what value is left. Okay? So they're going to have to give you this number, especially when you're taking tests and stuff. You're not going to be, how are you gonna know this? They're going to have to tell you the supplies at the end of the period just like I have here. The company notes that $200 worth of supplies are left. So they're going to tell you what's left. Okay? So the trick here is that that $200 that's left, that should be the balance in the supplies account, right? Right now, the supplies account is sitting at $800 from when we purchased it. We've used up a bunch of stuff and we've noticed that there's only $200 worth of it left. So supplies should have a $200 balance, not an $800 balance, right? So how do we get down from 800 down to 200? Well, 800 minus 200 is equal to 600, right? So that's basically what we've used up, right? We started with 800 in the supply closet. We used a bunch of it up and we're left with $200 worth that means we've used up $600 worth. So what we're going to do is we're going to have a supplies expense for what we used up. Supplies expense and we're going to debit it for 600, right? So now we've created this expense for 600 and that's the amount of supplies we've used. And now we have to decrease the balance of supplies by the same $600, right, to get it to the correct final balance. So, if we think about supplies, it was sitting at $800 minus the $600 that we used up, gets us to the final balance of $200, which is the correct amount that we counted, right? How about supplies expense? Well, that's sitting at $600, right? That is the amount that we used up. Cool. Let's pause right here and then we'll continue with the cash basis to accrual basis of accounting, right? Let's check that out.

Adjusting Journal Entries: Supplies (Cash Basis to Accrual Method)

All right. So here in the red boxes, I want to talk about the cash basis to accrual basis. Whoops. Cash basis to accrual. Okay? So technically, the blue boxes are like the correct way to do it from the beginning. But sometimes you'll see it happen like we'll do in these boxes. Okay. So from the other angle, what could happen? The company purchases $800 worth of supplies, which they pay for in cash. From a cash basis, we would do something like debit supplies expense, cash for 800, and we would credit cash for 800, right? We paid for it in cash, we lower our cash balance with the credit, and we increase our supplies expense with that debit. Right? So right now, that's from a cash basis. We paid for it in cash. All of it's sitting in the expense account. All right. But now let's adjust it to the correct amount on the adjusting date. So they note that $200 worth of office supplies are left. We follow the same logic where we've used up $600 of the supplies, right? We started with $800, we're left with 200. $600 must have been used up. So what is the correct balance in supplies expense? Excuse me. The supplies expense should be at $600, right? But the supplies expense is currently at $800. So we need to bring it down by $200, right? So how are we going to do that? We are going to credit supplies expense for 200. We're lowering the value of supplies expense by $200 to get it to the correct balance of $600. And what about the debit? Well, in this case, we don't have a supplies account yet, right? We never created a supplies account. So that's what we need to debit the supplies account for this $200 that was not used up, right? So if we look at our final balances down here at the bottom, let me get out of the way, down here underneath, the supplies account is now sitting at 200, right, because we just debited it for $200. And our supplies expense, well, it was $800. We took away $200, and it got us to $600. So notice that in both cases, our supplies and our supplies expense end up at the same number. So we end up with the same number in both cases, either way is technically correct. Okay? So let's go ahead and pause here and move on to the next video.

A company has $350 in its supplies account at the beginning of the year. Throughout the year, the company purchased an additional $500 worth of supplies, which it recorded to the supplies account. The year-end count of office supplies revealed a remaining balance of $400. The entry to adjust the balance of the supplies account would include:

• A. Debit Supplies $450; Credit Supplies Expense $450
• B. Debit Supplies Expense $450; Credit Supplies $450
• C. Debit Supplies $50; Credit Supplies Expense $50
• D. Debit Supplies Expense $50; Credit Supplies $50

Here’s what students ask on this topic:

What are adjusting entries for supplies in accounting?

Adjusting entries for supplies are necessary to ensure accurate financial reporting. Supplies are initially recorded as assets when purchased. At the end of the accounting period, the remaining supplies are counted. The difference between the initial purchase amount and the remaining supplies is recorded as a supplies expense. This adjustment ensures that the expense is recognized in the period the supplies were used, adhering to the accrual basis of accounting.

How do you record the purchase of supplies in accounting?

When supplies are purchased, the accounting entry involves debiting the supplies account and crediting cash. For example, if a company purchases $800 worth of supplies, the entry would be:

$\mathrm{Debit} \mathrm{Supplies} 800$

$\mathrm{Credit} \mathrm{Cash} 800$

This entry increases the supplies asset account and decreases the cash account.

How do you adjust the supplies account at the end of the period?

At the end of the period, the supplies account is adjusted based on the remaining supplies. For instance, if $800 worth of supplies were purchased and only $200 worth remains, the adjustment entry would be:

$\mathrm{Debit} \mathrm{Supplies} \mathrm{Expense} 600$

$\mathrm{Credit} \mathrm{Supplies} 600$

This entry reduces the supplies account to $200 and records a supplies expense of $600.

What is the difference between cash basis and accrual basis for supplies adjustment?

Under the cash basis, supplies are expensed when purchased. For example, purchasing $800 worth of supplies would be recorded as:

$\mathrm{Debit} \mathrm{Supplies} \mathrm{Expense} 800$

$\mathrm{Credit} \mathrm{Cash} 800$

Under the accrual basis, the expense is recognized when supplies are used. At the end of the period, the remaining supplies are counted, and the expense is adjusted accordingly. This ensures expenses are matched with the period they benefit.

Why are supplies considered assets in accounting?

Supplies are considered assets because they are items purchased and owned by the company, which will be used in future operations. When supplies are purchased, they provide future economic benefits, making them assets. As they are used, their value is expensed, reflecting their consumption in generating revenue.