Typically, current assets are considered assets that provide economic benefits to the owner for at least one year. With few exceptions, any asset that does not provide value within a year shall not be classified as a current asset. In general, supplies are considered current assets until they are used. Once supplies are used, they are converted to expenses. Therefore, office supplies cannot be classified as current assets because they have no long-term value. Their value decreases over time and can eventually become a liability or expense.
Are Supplies an Expense?
Once a business uses a material, the material becomes an expense. However, there is also a situation where a company can treat the supply as an expense rather than a current asset. If the value of the supply is not significant and therefore will not have an impact on the business’ financial reporting, the business may debit the supply expense account at the time of purchase. This way, the supplies are immediately considered an expense from the time of purchase. Companies can do this even if it violates accounting principles because accounting principles are called materiality.
Why Supplies Are Expense Not Current Asset
Office supplies can be classified as current assets when they are not in use, but become expenses once they are used up.
Assuming the value of office stationery or any other supply is deemed insignificant, it may not have an impact on the company’s financial reporting. Therefore, organizations can debit the office supply expense account at the time of purchase.
Although this may violate accounting standards, there are reasons for companies to do so under an accounting principle called “materiality”
What is Materiality?
Materiality is an accounting principle that states that an accounting standard can be ignored if its impact on a business’s financial statements is negligible, and therefore will not mislead anyone reviewing a business’s financial reports. According to generally accepted accounting principles, if an item is not material, it does not have to follow accounting principles.
Under U.S. Securities and Exchange Commission guidelines established in 1999, any item representing 5% or more of a business’s total assets should be considered a material item and listed separately on its balance sheet. So in the case of supply, if the value of the supply is large enough to be at least 5% of your total assets, you should report it as a current asset on your balance sheet.
That said, there are no hard and fast rules about when an item should be considered insubstantial, so you must use your judgment to determine. Projects that account for less than 5% of total assets can still be considered significant projects. For example, if a low-value item still turns a net profit into a net loss, the item should be considered a significant item, no matter how insignificant its value may be.
Are Supplies Credit or Debit?
In the field of bookkeeping, for every transaction, most transactions will be credited or debited. In-office supplies, you don’t need to go into them unless they’re irrelevant. Taking this step judiciously means you can debit these supplies as part of your office supplies account charges. If you pay for these supplies in cash, you will have to credit your cash account. Taking this action also means that office supplies that cost no more than 5% of total revenue should not be classified or charged to the current account. It’s a good idea to credit these supplies to your office supplies account as part of the cost. If you pay for office supplies in cash, you must credit them as an expense to your office supplies account.
What Is the Difference Between Supplies and Inventory?
Supplies are the items a company uses to run its business and increase its revenue, while inventory is the items a company manufactures or buys to sell to customers. It is important to correctly classify supplies and inventory, as their classification can have tax implications.
Your business must pay VAT on supplies, but you do not have to pay VAT on inventory. This is because goods are usually taxed only once at the retail level. So, in the case of inventory, when you sell items to your customers, those items will be taxed. However, when you buy supplies like pens, paper, or printer toner for your business, you are the end consumer, so you must pay sales tax on those supplies.
Conclusion
Since current assets are assets that provide an organization with economic benefits for at least a year, you can add valuable company office stationery to the current portion of your balance sheet. There are no hard and fast rules about where to put this stationery on your balance sheet, especially when the stationery or set of stationery has face value. For the sake of clarity, it’s best to follow standard procedures for entering such items, as this will better organize you for things like taxes. By comparing the value of components such as office stationery, professional auditors are most likely to find the correct input location.
