How to account for supplies

By: Tim Mcintosh

As with depreciation expense, repair and maintenance expenses need to be allocated between the cost of sales, selling expenses, and operating cost depending on where the assets are in use. Salaries, wages, and benefits expenses include the payroll cost of permanent and temporary employees of an organization for their services during an accounting period. But because this involves accounting, there are exceptions to that rule. When there is an exception, it would likely fall into the office expense or office equipment category.

Strategies for Small Business Owners

Cost of goods sold is a calculation on your business tax return that looks at your inventory changes during the year and everything that you spend to make and ship products to your customers. The cost of rent relating to production and sales activities are charged to the cost of sales and selling expenses instead of operating, general, and administrative expenses. Let’s take a look at all three business expense categories and how to classify them properly. When it comes time for a business owner to complete business tax forms, it can get a bit confusing when trying to understand how to handle equipment and supplies purchased for business purposes. These two types of purchases are considered in different ways for accounting and tax purposes. The IRS outlines that business expenses must be both “ordinary” and “necessary” for them to be deductible.

  1. This process is critical to recognizing expenses in the correct amount and reporting period.
  2. However, the option remains for you to expense that item over an extended period if you wish.
  3. Once the expense is recorded, you no longer have to track the amount of paper, as you would with an asset.
  4. Regular monitoring and strategic management of expenses are crucial for maintaining financial health and ensuring profits.
  5. We may earn a commission when you click on a link or make a purchase through the links on our site.

Types of Business Expenses

Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment. On top of that, tracking expenses helps you stick to a budget, which is crucial for any small business owner. By setting a budget for specific periods or projects, you can make sure you’re allocating your resources where your business needs them. Examples of office supplies are desk supplies, forms, light bulbs, paper, pens and pencils, and toner cartridges.

IRS Requirements for Deductions

The IRS has a new simpler method for taking smaller cost assets as expenses instead of depreciating them. Effective in 2016 and beyond, you can deduct business assets (including office assets) that cost $2,500 or less. This includes software and software suites, laptops, tablets, smartphones, and other smaller electronics.

What is the best way to classify expenses within a company’s accounting system?

These assets typically provide value over several years and are therefore depreciated over their useful life, aligning the expense recognition with the income generated from their use. Effective bookkeeping is a fundamental aspect for the financial success of any small business. It focuses on the systematic recording of financial transactions, which is crucial for accurate financial reporting and tax compliance.

Resources for Your Growing Business

There will be some expenses, such as travel and dorm supplies, that families will need to cover on their own. Technically, you can make non-qualified withdrawals from your NC 529 Account to pay these expenses. However, it’s important to note that you will incur taxes and penalties on those withdrawals. You will have to pay federal and state taxes on the earnings plus a 10% penalty.

Study abroad-qualified education expenses are covered under an NC 529 Plan, provided the international institution is eligible for federal student aid. However, travel costs to and from the study abroad location are considered non-qualified expenses. The term “qualified education expenses” may sound confusing, but it’s intentionally broad.

If these supplies were purchased on account, you’d have to first record the purchases in accounts payable. The easiest way to classify office supplies, expenses, and equipment is to look at each purchase separately and decide how it should be classified. One of the main goals of company management teams is to maximize profits.

An exception to this would be a retailer of stationery supplies or a printing press, in which case you will show these expenses as a part of the cost of sales. You can calculate depreciation expense by dividing the depreciable amount of an asset (i.e., cost minus its value at the end of its useful life) over its useful life. Recording the bad debt expense and the provision for doubtful receivables brings the value of the receivables shown in the balance sheet closer to what is likely to be received by the business in the future.

In this case on the left hand side of the accounting equation the asset of supplies on hand decreases by 150. To balance the equation the supplies expense in the income statement reduces the net income, retained earnings, and therefore the owners how to calculate accrued vacation equity in the business by the same amount of 150. Supplies you use in a warehouse or for shipping products are different from supplies used in your office. The supplies and materials you use to produce products are included in cost of goods sold.

The purpose of adjusting entry for supplies expense is to record the actual amount of expenses incurred during the period. The supplies expense figure computed on 31 december is not correct since it doesn’t take into account the supplies that were consumed and therefore used up in 2016. As a result, the ending inventory figure for supplies appears to be correct, but it is not. Hence an adjusting entry is required to record the correct amount of supplies expense for 2016. These are often items that get used up quickly or have a relatively short lifespan in the business environment.

However, the Internal Revenue Service (IRS) has strict rules on which expenses businesses are allowed to claim as a deduction. For accounting purposes, business supplies are considered to be current assets. Business supply purchases are deducted on your business tax return in the “Expenses” or “Deductions” section. Categorizing expenses is a fundamental aspect of bookkeeping that ensures accurate financial tracking and reporting. Effective expense categorization allows businesses to see exactly where money is being spent, which is essential for budgeting and financial planning. It forms the basis for insightful financial analysis and can potentially lead to significant tax deductions.

A transition from physical to digital records is increasingly common, yet it is essential for digital records to be accurate, legible, and readily available for inspection, per IRS requirements. Businesses must ensure digital records are as reliable as their physical counterparts, with appropriate security measures in place. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications.

The purchase of equipment is not accounted for as an expense in one year; rather the expense is spread out over the life of the equipment. From an accounting standpoint, equipment is considered capital assets or fixed assets, which are used by the business to make a profit. In bookkeeping, categorizing expenses accurately is crucial for financial reporting and tax purposes.

The cost of goods sold does not include any cost incurred on inventory that is unsold at the end of an accounting period, which is why it needs to be subtracted from its calculation. Expenses can be defined as fixed expenses, such as rent or mortgage; those that do not change with the change in production. Expenses can also be defined as variable expenses; those that change with the change in production. Expenses can also be categorized as operating and non-operating expenses.

A bad debt expense is recorded for any specific receivables that are unlikely to pay back (e.g., any customers who have filed for bankruptcy). Whenever a business suspects that it may not recover the full amount of its receivables, it should record the loss immediately in its income statement in line with the prudence concept. Instead, it is added to the cost of the asset and charged as a depreciation or impairment expense over its useful life. Unless you buy a year’s worth of these items, they should all be expensed at the time they are purchased.


OR CALL OUR OFFICE (812) 378-5595