Assets are resources owned and controlled by entities that can result in potential positive economic benefits. These usually include building, land, machinery, inventory, cash, etc. Companies report assets on their balance sheets. On the other hand, expenses are economic outflows during a period. These include utilities, production costs, depreciation, etc. Expenses are a part of the income statement.
It is easy to differentiate between assets and expenses. Sometimes, however, the distinction may not be as obvious. For some items, companies may face a dilemma of choosing between expensing them out or capitalizing them. One such item includes accounting materials and office supplies. However, it is crucial to understand what capital and revenue expenditures are first.
What are Capital Expenditures?
Capital expenditures include any expenses incurred on fixed assets. However, for companies to capitalize on these expenses, it is crucial that they improve the asset. Capital expenditures include costs borne on maintaining or expanding a business to generate additional profits. These will involve acquiring fixed assets, such as buildings, plants, machinery, etc.
The accounting treatment for capital expenditure is that companies must treat them as an asset. When companies record these expenses, they must capitalize them. In some instances, expenditure on fixed assets may also not qualify as capital expenditure. However, those instances are rare. Capital expenditure does become an expense on the income statement eventually. However, that process occurs through depreciation over several periods.
What are Revenue Expenditures?
Revenue expenditures are the opposite of capital expenditures. These usually include expenses incurred on short-term assets or business operations. Companies cannot capitalize on revenue expenditures. Instead, they must expense them out in the period to which they relate. Usually, revenue expenditures include repair and maintenance, utilities, printing, and stationery, etc.
The accounting treatment for revenue expenditure differs from capital expenditure. Companies must expense these expenditures out in an accounting period. Unlike capital expenditure, revenue expenditure only relates to a specific period. These expenditures don’t become a part of the balance sheet. Instead, they end up on the income statement directly.
What are Accounting Materials and Office Supplies?
Accounting materials and office supplies include items that companies use in the office. These include printing and stationery items that companies use to perform tasks in departments. However, they do not contain manufacturing or shipping supplies. Accounting materials and office supplies are crucial in allowing companies to carry out administrative work.
There are several items that may count as accounting materials and office supplies. These include paper, printer cartridges, pens, pencils, sticky notes, tape, glue, etc. These items are not crucial for the production or service-provision process. However, they allow companies to perform administrative tasks that relate to the office.
For companies, primarily small ones, it is crucial to keep track of accounting materials and office supplies. Usually, these supplies last less than a year. Some may also have a life of over a year, although not that common. Regardless of the type of supply, the classification for these items is crucial. The accounting for accounting materials and office supplies is often criticized due to its nature.
What is the accounting treatment for Accounting Materials and Office Supplies?
The accounting treatment for accounting materials and office supplies requires companies to differentiate between capital and revenue expenditures. As mentioned, capital expenditures are expenses incurred on long-term assets while revenue expenditures are short-term. On top of that, companies must capitalize capital expenditure but expense out revenue expenditures.
When it comes to accounting materials and office supplies, the accounting treatment is that of revenue expenditures. It is because these materials and supplies do not fulfill the definition of capital expenditure. Accounting materials and office supplies are not fixed assets. Neither do these items expand a business or generate additional profits.
Furthermore, accounting materials and office supplies are disposable items with a life of less than a year. If these items long more than a year, the case for capitalizing them may be more relevant. However, most accounting materials and office supplies get used within a few months. This reason makes it more necessary for companies to expense out these items.
Lastly, most accounting materials and office supplies are inexpensive. Even if these items last longer than a year, capitalizing and depreciating these assets is costly. For most companies, the decision to expense out these supplies comes down to the low costs. Usually, it is more straightforward for companies to write them off rather than capitalize them.
How should companies determine if Accounting Materials and Office Supplies are assets or expenses?
The above definitions for revenue expenditures can help companies decide how to account for accounting materials and office supplies. However, there are several practices that companies can use as guidance to make the process straightforward.
The most critical factor for deciding whether accounting materials and office supplies are assets or expenses is consumption. If companies can consume these supplies within a year, then they must treat it as revenue expenditure. However, if a company purchases these supplies in a large quantity, it may capitalize them.
The costs for accounting materials and office supplies will also play a role in their accounting treatment. More specifically, if these costs are material, then companies may capitalize the amount. However, small items will end up as an expense in the financial statements. This decision will ultimately come down to the company’s policies.
What are the journal entries for Accounting Materials and Office Supplies?
Once companies decide to expense out accounting materials and office supplies, the journal entries become straightforward. For revenue expenditures, companies must write off the amounts in the income statement. Since accounting materials and office supplies are revenue expenditures, the same accounting treatment will apply to them.
Accordingly, when companies acquire accounting materials and office supplies, they must expense out those amounts. Therefore, the journal entries for those items will be as follows.Date Description Dr Cr Accounting materials and office supplies x,xxx Cash or Bank or Expense Payable x,xxx
The above journal entries must record the total expenditure incurred on accounting materials and office supplies. The debit account for accounting materials and office supplies is an expense account. Therefore, this account will appear in the income statement. Companies usually classify these expenses as administrative expenses. However, the classification may differ for each company.
Example
A company, ABC Co., acquires accounting materials and office supplies worth $500. These supplies include paper and stationery used for administrative purposes. Furthermore, the company estimates these supplies to end for 2-3 months. At the date of purchase, ABC Co. must record these purchases in its accounts. The company does not pay for these acquisitions at the time. However, it will compensate the supplier later.
The accounting treatment for the acquired accounting materials and office supplies is straightforward. Under the given circ*mstances, these purchases meet the definition of revenue expenditure. On top of that, the value of these supplies is minimal. Therefore, ABC Co. must treat them as an expense in its financial statements.
ABC Co. can use the following journal entries to record the acquired accounting materials and office supplies.Date Description Dr Cr Accounting materials and office supplies $ 500 Cash or Bank or Expense Payable $ 500
Conclusion
Accounting materials and office supplies include small items used within a company’s office. These costs usually fall under a company’s administrative expenses. In some cases, companies may also capitalize those items. That decision may depend on how long the accounting materials and office supplies will last and whether their cost is material.
