Purchased office supplies on account for $500

Q: What happens when a company purchases supplies on account?

Any purchases made with credit can be referred to as purchased on account.” A business that owes another entity for goods or services rendered will record the total amount as a credit entry to increase accounts payable. The outstanding balance remains until cash is paid, in full, to the entity owed.

When companies purchase supplies on account, they have to create several journal entries to record the transaction in their financial statements. These entries change the balance of the fundamental accounting equation, which is a pivotal part of the bookkeeping process. To understand the total impact of the purchase of supplies, it is important to know the components of the fundamental accounting equation.

Table of Contents Show

Fundamental Accounting Equation
Purchase on Account Journal Entry
Credit Accounts Payable
Credit Cash and Debit Accounts Payable
Putting it Together
Purchase Office Supplies on Account Journal Entry Example
Bookkeeping Explained
Purchase Office Supplies on Account Accounting Equation
Popular Double Entry Bookkeeping Examples
About the Author
What is the journal entry for purchased supplies on account?
How do I record purchased office supplies on account?
What account is purchased supplies on account?
What happens when a company purchases supplies on account?

Fundamental Accounting Equation

The fundamental accounting equation states that assets are equal to liabilities plus owners’ equity. This is a critical concept in the double-entry system of accounting, which also requires that debits must equal credits. Here's a simple example. Suppose you're starting a business selling children's clothing. You use your own $10,000 savings as startup capital and do not take out any other loans. In doing this, you increase your business’s assets and owner’s equity by the $10,000 you've invested:

Assets ($10,000) = Liabilities ($0)+ Owner's Equity ($10,000)

It’s important to note that sales and expense accounts impact the fundamental accounting equation because you have to close out the net income account to the retained earnings account at the end of reporting periods, which is an owners’ equity account. When you purchase supplies on account, it impacts the liability and asset variables in the accounting equation, reports Accounting Coach.

Purchase on Account Journal Entry

When you make a purchase of supplies on account, you must prepare a journal entry that contains one debit and one credit. The debit is made to the supplies expense account, which is a temporary account used to record costs that will be displayed on the income statement. Office supplies are not considered assets like office machinery, vehicles or equipment used for revenue generation. Expenses are not capitalized as fixed assets are, and accounting discrepancies often arise over the misclassification of operating expenses as capital assets.

Once you have recorded the supplies you purchased as an expense, the second part of the journal entry is ready to be entered.

Credit Accounts Payable

Crediting the accounts payable account completes the initial entry and directly impacts the accounting equation. Liabilities increase in the short term to record the obligation to the vendor of the supplies. Although it may appear that the fundamental accounting equation is out of balance at this point, this is only a temporary difference. The accounting equation comes back into balance when you pay the obligation or when you close out the temporary accounts to the permanent accounts.

Credit Cash and Debit Accounts Payable

When you are ready to pay the accounts payable obligation, you must prepare a second journal entry. You credit cash to record the disbursement of funds in payment of the debt and debit the accounts payable account. This transaction reduces assets and liabilities at the same time, which keeps the accounting equation in balance, reports Corporate Finance Institute. The fundamental accounting equation provides guidance for the creation of all journal entries entered into the general ledger.

Putting it Together

Suppose your children's clothing company needs to buy some office equipment for $500 but you only have $200 of cash. The supplier lets you buy the equipment with a down payment of $200 but you owe the supplier the remaining amount. This would result in:

A credit to equipment supplies: +$500
A credit to Accounts Payable: +$300
A debit to Cash: -$200

The net effect on the accounting equation would be:

Assets ($10,000 +$500 - $200) = Liabilities ($300) + Owner's Equity ($10,000)

In other words, the purchased office equipment on account causes both sides of the equation balance out.

When a business purchases office supplies on account it needs to record these as supplies on hand. As the supplies on hand are normally consumable within one year they are recorded as a current asset in the balance sheet of the business.

Purchase Office Supplies on Account Journal Entry Example

For example, suppose a business purchases pens, stationery and other office consumables for 250, and is given credit terms from the supplier.

The accounting records will show the following purchased supplies on account journal entry:

Purchase Office Supplies on Account Journal EntryAccountDebitCreditSupplies on hand250Accounts payable250Total250250

Bookkeeping Explained

Debit
The business has received consumable office supplies (pens, stationery, etc.) and holds these as a current asset as supplies on hand.

Credit
The credit entry represents the liability to pay the supplier in the future for the goods supplied.

Purchase Office Supplies on Account 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 total 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 an asset (supplies on hand) increases representing office consumables held by the business for immediate use. The other side of the accounting equation is the liability to pay the supplier for the items (accounts payable) at a future date.

Popular Double Entry Bookkeeping Examples

This purchase office supplies on account journal entry is one of many examples used in double entry bookkeeping, discover another at the links below.

Cash Payment of Expenses
Deferred Revenue Journal Entry
Personal Expenses and Drawings
Security Deposit Liability

Last modified October 4th, 2022 by Michael Brown

About the Author

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.

What is the journal entry for purchased supplies on account?

A purchase of supplies on account is recorded as a debit to supplies expense and a credit to accounts payable.

How do I record purchased office supplies on account?

What account is purchased supplies on account?

What happens when a company purchases supplies on account?

Any purchases made with credit can be referred to as “purchased on account.” A business that owes another entity for goods or services rendered will record the total amount as a credit entry to increase accounts payable. The outstanding balance remains until cash is paid, in full, to the entity owed.