When a business purchases consumable supplies such as stationary, it records these as supplies on hand in the balance sheet of the business. At the end of an accounting period, the consumable supplies on hand are counted and amount used is recorded as an expense in the income statement using an adjusting entry
To illustrate, suppose a business has a consumable supplies on hand account balance in the general ledger of 500. At the end of the accounting period a physical count is carried out. The count reveals the amount of 350 is actually held as an asset. The difference of 150 represents the amount of consumable supplies used during the period.
Consumable Supplies Used Journal Entry
At the end of the accounting period the business needs to record the adjustment of 150 to the consumable supplies on hand account. The following journal entry is used.
| Account | Debit | Credit |
|---|---|---|
| Supplies expense | 150 | |
| Supplies on hand | 150 | |
| Total | 150 | 150 |
The supplies expense has increased by 150 and the supplies on hand has decreased by the same amount.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
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 equity in the business by the same amount of 150.
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Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.