Is a Supplies Account a Temporary Account?

In an accounting context, “supplies” refer to items purchased and used to support business operations, rather than being part of the products or services sold. These consumables, such as office supplies like paper and pens, or cleaning supplies, are necessary for daily functioning. Understanding how supplies are treated in accounting is fundamental for accurate financial reporting and clear record-keeping.

Defining Account Types

Accounting categorizes accounts into two primary types: permanent and temporary. This classification determines how their balances are handled at the close of an accounting period.

Permanent accounts, also known as real accounts, represent assets, liabilities, and equity. Their balances carry forward from one accounting period to the next. Examples include Cash, Accounts Receivable, Equipment, Accounts Payable, and Retained Earnings, all of which appear on the Balance Sheet. These accounts provide a continuous record of a company’s financial position over time.

Conversely, temporary accounts, or nominal accounts, track financial activity over a specific period, typically a fiscal year. These accounts include revenues, expenses, and dividends or owner’s drawings. At the end of each accounting period, their balances are closed out and transferred to a permanent equity account, such as Retained Earnings or Owner’s Capital. This process allows businesses to measure performance for each distinct period, primarily through the Income Statement.

Supplies as an Asset Account

When a business initially purchases supplies, they are typically recorded as an asset on the Balance Sheet. This classification recognizes that supplies represent a future economic benefit to the company. They are considered assets because they have value and will be consumed over time to support revenue generation. This aligns with the accrual basis of accounting, where economic events are recognized when they occur, regardless of when cash changes hands.

The “Supplies” asset account is categorized as a permanent account. Its balance, which reflects the value of supplies still available for use, carries over to the next accounting period. For instance, if a company purchases $1,000 worth of supplies, the initial journal entry debits the “Supplies” asset account for $1,000 and credits “Cash” or “Accounts Payable” for the same amount, depending on the payment method. This entry increases the asset side of the accounting equation, reflecting the acquired resources.

Tracking Supplies Usage and Expense

While the “Supplies” asset account holds a balance, the portion of supplies a business utilizes during an accounting period transforms into an expense. This recognition of consumption is important for accurately matching expenses with the revenues they help generate, adhering to the matching principle in accounting. The cost of supplies used is recorded in a separate account known as “Supplies Expense.”

“Supplies Expense” is classified as a temporary account. Its balance reflects the cost of supplies consumed only within a specific reporting period, such as a month, quarter, or year. At the end of that period, the balance of “Supplies Expense” is reset to zero to prepare for the next period’s activity.

To properly account for this usage, businesses perform adjusting entries. An adjusting entry decreases the “Supplies” asset account and simultaneously increases the “Supplies Expense” account. For example, if a business began with $1,000 in supplies and determined $700 were used, the adjusting entry debits “Supplies Expense” for $700 and credits the “Supplies” asset account for $700. This process ensures the Balance Sheet accurately shows the remaining value of supplies, and the Income Statement correctly reflects the cost of supplies used to generate revenue during that period.

Impact on Financial Statements

Both the “Supplies” asset account and the “Supplies Expense” account play distinct roles in a company’s financial statements. The remaining, unused balance of the “Supplies” asset account, after adjusting entries, is reported on the Balance Sheet. This account is presented under current assets, as supplies are expected to be consumed or converted within one year or the operating cycle. This provides a snapshot of the business’s resources on hand at a specific point in time.

Conversely, the “Supplies Expense” account, which captures the cost of supplies consumed during the period, is reported on the Income Statement. It is listed as an operating expense, contributing to the calculation of net income or loss for that period. This presentation reflects the economic activity over a period of time. At the end of the accounting period, as a temporary account, “Supplies Expense” is closed out and its balance transferred to a permanent equity account, such as Retained Earnings or Owner’s Capital.