The accounting for office or store supplies is similar to prepaid or unexpired expenses. They are initially recorded as asset by debiting office or store supplies account and crediting cash account. At the end of the accounting period, the total cost of supplies used during the period becomes an expense and an adjusting entry is made for it. If this adjusting entry is not made, the income statement will show higher income and the balance sheet will show supplies asset that actually does not exist.
The accounting process for supplies:
Entry at the time of purchase of supplies:
When supplies are purchased, they are recorded by debiting supplies and crediting cash. The journal entry is given below:
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 supplies expense. This entry is made as follows:
The Green Company purchased office supplies costing $500 on January 1, 2016. Out of which, supplies costing $150 remained unused on December 31, 2016.
Required: In the books of Green Company:
- make a journal entry on January 1, 2016, when the office supplies are purchased.
- make an adjusting entry on December 31, 2016 to record supplies expense.
(1). when supplies are purchased:
(2). When cost of supplies used is recorded as supplies expense:
Supplies expense for the period: $500 – $150 = $350