Companies use various goods and products within their operations. These goods, known as assets, are crucial in helping companies generate revenues. Usually, companies classify assets based on how long they expect to use them.
Furthermore, they distribute the cost of some of those assets under depreciation. Other resources may get expensed out directly without the need to depreciate them.
Companies may also use goods and products without recognizing them as assets first. In this case, they will expense out the item directly. This process occurs for goods that are of low value.
The primary factor in this treatment will be differentiating between revenue and capital expenditures. Companies also divide those expenditures based on the areas where they occur.
One such expense is office supplies. Companies may buy these goods on credit through bulk purchases. For companies, it is critical to understand how to account for those transactions. Before that, it is crucial to discuss what office supplies encompass.
What is the meaning of Office Supplies?
The term office supplies do not have a specific definition or meaning. Instead, it encompasses a broad range of materials that companies use within their offices.
It usually includes essential items to perform the administrative tasks within a business. For example, office supplies may consist of paper, staplers, stationery, file folders, etc. These are usually insignificant items with minor costs.
Office supplies involve minor expenses on goods that companies need within operations regularly. These items are crucial for every business or organization.
However, companies may also incorporate more valuable goods in this category. For example, some companies classify fixed assets used in offices as office supplies. These may include printers, copy machines, phones, etc.
For most minor office supplies, companies use a bulk procurement option. Essentially, companies buy these goods in large quantities. Since they use these supplies regularly, having a significant number of items is more beneficial.
However, not all companies can afford to obtain these goods in bulk. Nonetheless, companies hold a decent backup of these goods until the resupply occurs.
Overall, office supplies do not include specific goods or products. Instead, they consist of a broad range of items that companies use within offices. It does not have a standard definition.
Office supplies usually include minor expenses that companies incur in the normal course of business. However, some companies may also consist of valuable assets and equipment within this class.
What is the accounting treatment of Office Supplies bought on credit?
The accounting treatment of office supplies may be complex. However, if bought on credit, it will involve an additional step. Essentially, office supplies may include a broad range of materials.
In most cases, these items are of low value. Companies can expense them out as they use them in their normal use in business. Sometimes, companies may also classify office supplies with a high worth under this heading.
Another issue to consider when treating office supplies bought on credit is discounts. Usually, companies receive a bulk discount when they purchase these supplies.
It occurs since companies buy a significant number of office supplies in one transaction. In exchange, the supplier will give them a discount. However, companies must determine if this discount falls under cash or trade discount in accounting.
When a company acquires office supplies, it must determine its classification. As stated above, office supplies usually contain insignificant expenses.
Therefore, companies can treat them as an expense in the income statement in that period. However, they may also include assets like printers or copy machines. In that case, the treatment will differ since companies must capitalize on those assets.
Therefore, the accounting treatment of office supplies includes various aspects. On top of that, the credit nature of the transaction will also introduce an additional complication to the process.
Essentially, it divides the accounting treatment into two stages. The first occurs when companies acquire the goods from a supplier. Consequently, companies record the expense or asset while also creating a liability.
Creating liability is crucial under the accruals concept in accounting. Essentially, companies must record an obligation for the purchase made. Later, companies repay the supplier for that amount.
This process will trigger the second stage of accounting for office supplies bought on credit. At this stage, companies will remove the liability recognized before. In exchange, they will record the compensation paid to the supplier.
How to record the journal entry of Office Supplies bought on credit?
Companies must consider two aspects when recording the journal entry of office supplies bought on credit. These aspects relate to the two sides of the double-entry for the transaction.
Essentially, an office supply journal entry includes the office supplies account as a debit. On the other hand, it records these goods as a liability on the credit side.
On the debit side of the journal entry, companies must put the office supplies account. However, this account may be an asset or an expense based on the acquisition. For high-value materials, companies may want to capitalize the amount. For insignificant purchases, companies can use the expense account.
If companies record the office supplies as assets, they can use the following journal entry.
| Date | Particulars | Dr | Cr |
| Office supplies asset | X.XXX | ||
| Office supplies payable | X,XXX |
On the other hand, companies may also record the purchase as an expense. In this case, the journal entries will be as below.
| Date | Particulars | Dr | Cr |
| Office supplies expense | X,XXX | ||
| Office supplies payable | X,XXX |
The second aspect of recording the journal entries for office supplies is the credit entry. Since companies acquire these goods on credit, this side will always include accounts payable.
However, the above journal entry only creates an obligation in the records. Companies settle this obligation at a later date. Therefore, it gives rise to another journal entry as well.
When companies settle the accounts payable balance, they can use the cash or bank account. Companies can record the journal entry for the credit aspect of the office supplies transaction this way.
Essentially, it involves removing the liability created before in the first stage. On the other side, it requires recording the compensation accounting.
The settlement transaction of office supplies bought on credit can use the following journal entry.
| Date | Particulars | Dr | Cr |
| Office supplies payable | X,XXX | ||
| Cash or bank | X,XXX |
This transaction does not impact the office supplies bought or its initial treatment. However, it is a part of the credit aspect of those supplies. Therefore, it is crucial to include it as a part of the journal entry for office supplies.
Example
A company, ABC Co., buys office supplies worth $1,000 on credit during an accounting period. These supplies include various consumable materials. Similarly, these contain insignificant items that ABC Co. does not want to capitalize on.
Therefore, it records those supplies as an expense in the accounting records. ABC Co. uses the following journal entries to record the transaction.
| Date | Particulars | Dr | Cr |
| Office supplies expense | $1,000 | ||
| Office supplies payable | $1,000 |
After two months, ABC Co. repays the supplier of those office supplies. The company uses its bank account to reimburse them. ABC Co. uses the following journal entries to record the settlement of office supplies bought on credit for that period.
| Date | Particulars | Dr | Cr |
| Office supplies payable | $1,000 | ||
| Bank | $1,000 |
Conclusion
Office supplies refer to minor expenses incurred by companies within daily operations. These expenses relate to the administration of business activities. In other words, they occur within offices and similar areas.
The accounting for office supplies bought on credit must consider two aspects. These aspects also define how to record the journal entry of those supplies.