When should supplies be recorded as an expense?
Supplies are expensed when they’re used or consumed in operations — not when purchased. Until then, they’re treated as assets and moved to expense as they help generate business revenue.
Supplies expenses
Supplies should be recorded as an expense when they are used or consumed in business operations, not necessarily when they are purchased. This ensures that expenses align with the period in which they actually contribute to generating revenue, following the matching principle in accounting.
When to record supplies as an expense
- Under accrual accounting: Record supplies as an expense when they are used, not when purchased. Unused supplies at the end of an accounting period are recorded as an asset (“Supplies on Hand”) until consumed.
- Under cash accounting: Record supplies as an expense when they are paid for, regardless of when they are used.
- Supplies are considered current assets when purchased and move to operating expenses as they’re used up.
- Conduct periodic inventory counts to adjust supplies expense and maintain accurate balances.
- For tax purposes, most small businesses using the cash method can deduct supplies in the year they’re bought if they’re typically used within 12 months.
How to categorize supplies in accounting
- Record unused supplies as an asset under “Office Supplies” or “Inventory – Supplies.”
- Transfer the cost to Supplies Expense on the income statement as they’re consumed.
- Maintain a clear distinction between office supplies, production supplies, and inventory materials depending on use.
- Adjust the supplies expense account at month-end or year-end to reflect actual usage.
Examples of supply expense timing
Tax implications for supply expenses
- Supplies used for business purposes are fully deductible as operating expenses.
- Under IRS rules, small businesses may deduct supplies when purchased if used within the same year.
- Supplies that provide benefit beyond one year (e.g., durable tools) should be capitalized and depreciated instead.
- Maintain receipts and usage records to verify timing and support deductions.
- Deduct supplies on Schedule C (for sole proprietors) or in the “Office Supplies” or “Supplies Expense” section of your business tax return.
