Buy office supplies for $100 cash: Cash decreases by $100. Supply expense increases by $100. An expense is a negative entry in retained earnings, so owners’ equity decreases by $100. Why does this not increase assets by $100 since office supplies are an asset?
I think due to the fact that office supplies is a cost of providing the goods and services, it should be classified as an expense rather than an asset. I think it is a judgement call though, and can go either way. Does the question mention what kind of company it is?
I would’ve had the original entry of Supplies (asset) going up 100 and Cash (asset) going down 100 Then as the supplies were used up decrease the Supplies account and increase the Supplies expense It seems they skipped over that step though
Office supplies usually is not capitalized, so it would not be an asset, it is simply expensed. For instance, you would list a box of paperclips as an asset, decreasing this value as they are used, right? Office supplies in general, such as paper, folders, staples,etc. are mostly used during the accounting period, which is why they are simply expensed. Whereas, if the company purchased an office desk for cash, the desk would be capitalized as office furniture, then depreciated over time. In this case, the asset “cash” would decrease and the asset “Office furniture” would increase. Does this make it clearer?
Because supplies are usually such a minimal cost, it makes more sense to expense than capitalize (record an increase in assets). It would be a huge pain in the butt to keep inventory of paperclips, staples, pens, etc. You would have to constantly making journal entries to expense costs when the ink of a pen ran out. Small purchases are easier to expense at purchase than amortize/depreciate over useful life. Does that make sense?
Got it. That helps a lot. Gotta remember about capitalizing vs. expensing. Thanks.
This is completly subjective question. It would not be unheard of for a firm to capitalize a office supplies, for example if you were to buy in bulk, say a years worth of supplies at once, consuming them proportionately over a number of periods. The key is consistancy. If your going to capitalize office supplies, you have to do it consistantly. Not just when you want to lower your debt-to-equity ratio.