Supplies (Accounting)

In accounting, supplies are items that a business buys to use up in its day-to-day operations, rather than to sell to customers or to keep as long-term equipment. Examples include office supplies such as paper, ink and stationery, cleaning materials, small tools, shop consumables, and packaging used for shipping. Factory supplies such as lubricants and glue are known as indirect materials.

Supplies have two accounts. The supplies account, sometimes called supplies on hand, is a current asset representing items bought but not yet used. Supplies expense records the cost of items used up during the period. Under the accrual basis of accounting, the cost moves from the asset to the expense as the supplies are consumed, in line with the matching principle.

• Merchandise or finished goods that a business sells are inventory, not supplies. A stationery shop's paper for sale is inventory; the same paper used in its own office is supplies.
• Materials that become part of a product, such as wood in a table, are raw materials. Minor items used in production but not traced to specific products, such as sandpaper, are indirect materials and form part of manufacturing overhead.
• Items with a useful life of more than a year, such as computers and furniture, are normally fixed assets and depreciated, unless they fall below the company's capitalization threshold.

When supplies are bought, the business debits supplies, the asset, and credits cash or accounts payable. During the period, no entry is usually made as items are taken from the stock cupboard. At the period end, someone counts the supplies still on hand, and an adjusting entry records the amount used:

Here $\text{Beginning supplies}$ is the asset balance at the start of the period, $\text{Supplies purchased}$ is the cost of supplies bought during the period and $\text{Ending supplies}$ is the cost of supplies counted at the end. The adjusting entry debits supplies expense and credits supplies for the amount used.

A dental practice starts the year with $1,800 of supplies on hand. During the year it buys $14,600 of gloves, masks, cleaning products and office stationery, debiting the supplies account each time. A count on 31 December finds $2,300 of supplies left. Supplies used are $1,800 plus $14,600 minus $2,300, or $14,100. The adjusting entry debits supplies expense $14,100 and credits supplies $14,100. The income statement reports supplies expense of $14,100, and the balance sheet shows supplies of $2,300 as a current asset.

If the adjusting entry were forgotten, the balance sheet would overstate assets by $14,100 and the income statement would overstate profit by the same amount, because the cost of supplies used would never have been expensed.

Some businesses use the opposite approach, debiting supplies expense when items are bought. At the period end they then adjust the expense down by the value of supplies on hand, moving that amount to the asset. Both methods give the same final balances.

Because supplies are usually small in value, many businesses simply expense them when purchased and skip the count, which is acceptable under materiality when the amount on hand is not significant. Larger organizations, hospitals and laboratories with costly consumables keep detailed records and may use a perpetual system with reorder points. For US income tax, the IRS allows incidental materials and supplies to be deducted when paid if no record of consumption is kept and taxable income is clearly reflected; otherwise they are deducted when used. Supplies are reported on the balance sheet among current assets, often combined with prepaid expenses or other current assets when small.