Understanding the Accounting Entry for Supplies Used
Supplies are items companies use while doing business. These include office supplies like paper, pens, and printer ink or cleaning supplies like soap and paper towels. When companies first buy supplies, they record them as assets. However, as workers use these supplies, their value decreases, and companies need to track this change in their books.
The Basic Accounting Entry
When companies use supplies, they need to make an entry in their books. This entry shows two things: first, that the supplies asset has decreased, and second, that the company has spent money on supplies. The entry looks like this:
Debit: Supplies Expense Credit: Supplies
This entry moves money from the Supplies account (an asset) to the Supplies Expense account (an expense). The amount matches the amount of supplies workers used during the accounting period.
Why This Entry Matters
Companies make this entry to show the real cost of doing business. Without it, their books would show they have more supplies than they do, and their profit would look bigger than it is. Making this entry helps give a true picture of the company’s finances.
When to Make the Entry
The Accounting Period
Companies usually make this entry at the end of their accounting period. The timing depends on how often the company reports its finances. It might be every month, every three months, or every year.
Physical Count of Supplies
Before making the entry, workers often count the supplies they have left. They compare this amount to what their books say they should have. The difference is how much they used.
How to Calculate the Entry Amount
The math for this entry is straightforward. Companies start by determining their initial supply. They add any new supplies they buy and subtract what is left. The answer tells them how much they used.
For example, if a company:
- Started with $1,000 in supplies
- Bought $500 more supplies
- Has $300 left at the end
They used $1,200 in supplies ($1,000 + $500 – $300 = $1,200).
Small Versus Large Companies
Small companies might track every pen and paper clip. Big companies often estimate their supply use. They might check their supplies less frequently or use computer systems to track them.
Effects on Financial Statements
Balance Sheet Changes
The supplies entry changes the balance sheet. It reduces the Supplies account under Current Assets, reducing the company’s total assets.
Income Statement Impact
The entry also affects the income statement. It adds to the company’s expenses, which reduces its profit. This gives a more accurate picture of how much money the company made.
Common Mistakes to Avoid
Timing Problems
Some companies forget to record their supply use until long after it happens, which can cause their books to be incorrect. It’s better to track supply use regularly.
Missing Supplies
Sometimes, supplies go missing or get damaged. Companies should count this as use, too. If they don’t, their books won’t match reality.
Wrong Amount
Companies sometimes guess how many supplies they use without counting what’s left. This can lead to wrong numbers in their books. Regular counting helps prevent this problem.
Special Cases
Unused Supplies
Sometimes, companies buy supplies but don’t use them right away. These stay in the Supplies account until workers use them. Companies don’t need to make an entry for unused supplies.
Damaged or Obsolete Supplies
Companies handle this differently if supplies get damaged or become too old to use. They might need to write off these supplies completely, even if no one used them.
Modern Accounting Methods
Digital Tracking
Many companies now use computer systems to track their supplies. These systems can count supplies automatically and even order more when supplies run low.
Barcode Systems
Some companies put barcodes on their supplies. Workers scan the supplies when they take them, helping to track supply use in real-time.
Industry Differences
Manufacturing Companies
Factories often treat supplies differently from office companies. They might count some supplies as part of their product cost instead of a regular expense.
Service Companies
Service companies like law or consulting firms usually have simpler supply tracking systems. They mainly deal with office supplies.
Best Practices
Regular Counting
Companies should count their supplies regularly. This helps catch mistakes early and keeps their books accurate.
Clear Policies
Companies need clear rules about who can take supplies and how to record their use. This helps prevent waste and theft.
Good Storage
Keeping supplies organized makes them easier to count. It also helps prevent loss and damage.
Future Trends
Automated Systems
More companies are using automated systems to track supplies. These systems can order supplies automatically and update the books without human help.
Environmental Concerns
Many companies now track the cost of supplies and their environmental impact. This might affect how they record and report supply use.
International Differences
Different Countries
Different countries might have different rules about recording supply use. Companies that work in multiple countries need to know these rules.
Currency Issues
Companies that buy supplies in different currencies must carefully handle exchange rates when recording supply use.
Teaching New Workers
Training Importance
Companies need to teach new workers how to handle supplies correctly. This includes recording when workers take supplies and reporting problems.
Common Questions
New workers often have questions about supplies. Having clear answers helps them learn quickly and avoid mistakes.
