Question

Think about office supplies. What is the right accounting approach to record purchases of office supplies and how should its usage be recorded?

Answer 1

HI,

Any expenditure is primarily classified into two, Capital expenditure and revenue expenditure.

A capital expenditure is the cost incurred to acquire or upgrade physical assets such as Land & Building, Plant & machinary , Furniture , etc which provide benefits over a long period of time, more than 12 months.

A revenue expenditure is a day to day expenditure incurred in operating the business and usually pertains to the financial year of 12 months. They don't have any long term benefit.

Revenue expenditure is further divided into Direct expenses and Indiect expenses. Direct expenses are those which have a direct bearing on the functioning of the business and are primary activities such as Purchases, DIrect wages, etc. Indirect expenses are also critical to the business and affect profitability but are usually support activities to the business such as Administrative expenses , Selling expenses , etc.

In the given case, Office supplies usually include copy paper, toner cartridges, business forms, pens, pencils, stamp pads, letter envelopes and other desk supplies. Office supplies are expenses associated with administrating the operation of your business. Hence, they will form part of Indirect expenses in your revenue expenditure and will normally be recorded in the Profit and Loss A/c under the head " Printing and Stationary" .

However, when you use the accrual basis of accounting, you record unused office supplies in an asset account and charge the supplies to an expense account as you use them. But if you don't spend a lot of money on office supplies, you can debit the expense to the Profit and Loss A/c at the time you make the purchase.