Adjusting Entries: Supplies: Videos & Practice Problems

In accounting, adjusting entries are crucial for accurately reflecting a company's financial position, and one specific type is the adjusting entry for supplies, which falls under the category of deferrals. Supplies, such as notepads, paper clips, and other office materials, are considered assets because they are purchased and owned by the company until they are used. This understanding is essential for managing the supplies account effectively.

When a company purchases supplies, it records the transaction by debiting the supplies account and crediting cash. For example, if a company buys $800 worth of supplies, the entry would be:

Debit: Supplies $800
Credit: Cash $800

This entry increases the supplies asset on the balance sheet. However, at the end of the accounting period, an adjusting entry is necessary to reflect the actual amount of supplies remaining. This involves conducting a physical count of the supplies on hand. If, for instance, the company finds that $200 worth of supplies are left, it indicates that $600 worth of supplies have been used during the period.

To adjust the supplies account, the company must recognize the supplies expense incurred. The adjusting entry would be:

Debit: Supplies Expense $600
Credit: Supplies $600

This entry decreases the supplies asset to its correct balance of $200 and records the expense of $600, reflecting the supplies that have been consumed during the period. Thus, the supplies account transitions from an initial balance of $800 to the adjusted balance of $200, accurately representing the supplies available for future use.

Understanding this process is vital for maintaining accurate financial records and ensuring that expenses are properly matched with the revenues they help generate, adhering to the accrual basis of accounting.

Understanding the transition from cash basis to accrual basis accounting is essential for accurate financial reporting. In cash basis accounting, transactions are recorded only when cash is exchanged. For instance, if a company purchases $800 worth of supplies and pays in cash, the journal entry would involve debiting the supplies expense account and crediting cash, both for $800. This reflects an immediate expense recognition, resulting in a supplies expense of $800.

However, to align with accrual accounting principles, adjustments are necessary at the end of the accounting period. Suppose the company notes that $200 worth of office supplies remain. This indicates that $600 worth of supplies has been used. To correct the supplies expense balance, which currently stands at $800, an adjustment is required. The supplies expense should reflect only the amount used, which is $600.

To adjust the accounts, a credit entry of $200 is made to the supplies expense account, reducing it to the correct balance of $600. Simultaneously, a debit entry of $200 is made to the supplies account, which was not previously established. This reflects the remaining supplies on hand. After these adjustments, the supplies account will show a balance of $200, and the supplies expense will accurately reflect the $600 used.

Ultimately, both cash basis and accrual basis methods can lead to the same final balances for supplies and supplies expense, demonstrating that while the timing of recognition differs, the end result can be consistent when adjustments are made appropriately.