What Are Consumables in Business? Accounting & Tax Rules

Consumables are goods that businesses use and replace regularly as they are depleted or worn out. These items are distinct from long-term assets, which provide value over multiple years. The short-term nature of consumables impacts how they are accounted for on financial statements and treated on tax returns.

Identifying Business Consumables

General Office Consumables

Most businesses use general office consumables to keep administrative functions running. Examples include pens, paper, ink and toner cartridges, staples, and notebooks. Breakroom items, such as coffee, snacks, and disposable cups, also fall into this category as they are consumed by employees.

Manufacturing Consumables

In a manufacturing environment, consumables are part of the production process but not the final product. This includes industrial lubricants for machinery, welding rods, cleaning solvents, and safety equipment like disposable gloves. These supplies are used to maintain equipment and ensure an efficient workflow.

Service Industry Consumables

Service-based businesses use consumables to deliver their services to customers. For a cleaning company, this includes cleaning agents, sponges, and paper towels. A hair salon would use items such as shampoo, hair color, disposable capes, and gloves.

Retail Consumables

Retail businesses use consumables for daily sales activities that facilitate the customer experience. Common examples are shopping bags, receipt paper, price tags, and shipping supplies. These items are used up in the process of making a sale.

Accounting for Consumable Supplies

Consumables are recorded as expenses rather than assets because they do not provide a future economic benefit beyond the current operating period, which is one year. When a business purchases these supplies, the cost is recorded on the income statement. This reduces the company’s profit for that period.

This practice contrasts with capital assets, such as machinery or vehicles, which are capitalized. Capitalizing means the cost is recorded on the balance sheet as an asset and then gradually expensed over its useful life through depreciation. Because of their short-term nature, consumables bypass this capitalization process.

For some businesses, particularly in manufacturing, consumables can be categorized as part of the Cost of Goods Sold (COGS). This occurs when the supplies are directly tied to the production of goods for sale. For most other businesses, consumables like office supplies are treated as general operating expenses, sometimes referred to as selling, general, and administrative (SG&A) expenses.

Tax Implications for Business Consumables

The cost of consumable supplies is generally fully deductible in the year they are used. The Internal Revenue Service (IRS) allows businesses to deduct all ordinary and necessary expenses. Consumables qualify as they are common, accepted, and helpful for a business.

To claim these deductions, businesses must maintain records like receipts and invoices that detail the items, purchase date, and cost. This documentation is required to prove the expenses during an IRS audit. Without proper records, the IRS could disallow the deductions, resulting in a higher tax liability, penalties, and interest.

These expenses are claimed on the annual income tax return. Sole proprietorships use Schedule C (Form 1040), while corporations and partnerships use their own specific forms. The total cost of supplies is entered as a business expense, which reduces the company’s taxable income and its overall tax obligation.