Supplies Inventory Purchases Method vs Consumption Method – Governmental Accounting
What is inventory?
The items in inventory are those that a company sells to customers for a profit. For instance, the books that a bookstore sells to its customers make up its inventory. Items that a company produces or buys from suppliers or distributors are considered inventory. Raw materials used by the company to create the products it sells can also be referred to as inventory. Businesses may sell the items they buy as-is or combine them to make a new product when they buy inventory. Typically, businesses do not want to keep inventory around for too long because it could result in storage costs or become dated.
What are supplies?
Supplies are items that businesses use on a daily basis to conduct their operations. These resources aid staff members in carrying out their regular duties or generating revenue. Due to their use, these items frequently have a limited lifespan and end up costing businesses money. Until they are used, supplies are considered current assets in accounting before they are classified as expenses. Pens, paper clips, and printer ink are typical examples of office supplies used by businesses.
What are the differences between supplies and inventory?
Both supplies and inventory are necessary resources that businesses keep on hand. The following are some of the key distinctions between these two ideas:
Purpose
As mentioned, supplies and inventory serve different purposes for businesses. Individuals purchase supplies to support their businesss operations. These materials could facilitate the smooth operation of the company or help staff members carry out their regular duties. In contrast, inventory is made up of goods that companies buy or produce in order to sell to customers and turn a profit. For instance, the various clothing items that a clothing boutique sells are included in its inventory. Supplies used by staff to clean the store after hours and bags used to carry customers’ purchases out of the store are among these items.
Accounting
Supplies and inventory represent two distinct concepts in accounting. As mentioned, supplies are current assets until they are used by the company. The dollar amount of the unused supplies that a business has on hand can therefore be listed as “supplies” under the assets section. The company may also include the cost of the supplies used during the accounting period in the “supplies expense” section of the financial statements.
Additionally, since inventory represents goods that companies hold but intend to sell within the year, businesses include it as a current asset on their balance sheets. Businesses can keep track of a variety of inventory types, including raw materials, goods in production, and finished goods. Businesses report the value of inventory on the balance sheet based on the cost of acquisition. When a business sells inventory items, those costs are transferred from the inventory category to the income statements’ cost of goods sold and product revenue categories.
Sales tax
Governments impose a fee known as sales tax on the purchase of goods and services. The sales tax rate differs by state and local governments. Usually, a single tax is imposed on goods, and the purchaser is responsible for paying it. Sales tax must therefore be paid by businesses on supplies but not on inventory. Businesses use purchased items, like office supplies, to represent the entity. In the meantime, since the inventory items are used by customers, they will be taxed when sold to them.
Expenses
Businesses can define their costs as fixed and variable. Typically, fixed costs are predetermined expenses that a company must cover, frequently on a regular basis. Rent, salaries, and property taxes are typical examples of fixed costs. These costs, though, also include outlays unrelated to or unrelated to the output of the company. Therefore, some supplies can serve as a fixed cost. For instance, if your company sells more goods, you are not required to provide your staff with more pens.
Variable costs are expenses that are directly related to the production of goods and services by your company. The more you produce, the higher your variable costs. One typical illustration of a variable cost is the cost of the raw materials used to create the products. As a result of their necessity for producing the goods that businesses sell to customers, these raw materials can also serve as a form of inventory for businesses.
Examples of supplies
Supplies are items that businesses use to support their daily operations, as was previously mentioned. The supplies that businesses use and buy can differ based on the businesses. Here are some examples of supplies:
Office supplies
Businesses that run in office environments buy the supplies needed for staff to carry out their regular tasks. These tools could also aid in structuring the work they produce. Employees who produce reports, for instance, require paper to print and present their findings as well as staplers to keep the documents together. Some other common examples of office supplies include:
Shipping supplies
Another typical example of a supply that businesses buy is shipping items. Some businesses must purchase these supplies to get their products ready for shipping to customers. Some people might have to send materials and documents to other businesses. Some common examples of shipping supplies include:
Cleaning supplies
For the benefit of both their staff and customers, businesses must maintain a clean and secure environment. Depending on the industry, an unclean workplace may cause disruptions or have other detrimental effects on employees’ ability to do their jobs. They consequently frequently buy cleaning products to sanitize surfaces or eliminate garbage and litter gathered throughout the day. Some common examples of cleaning supplies include:
Examples of inventory
A company’s inventory is made up of the goods it produces or buys and sells to its clients. Businesses may keep various kinds of inventory, including those listed below.
Raw materials
The term “raw materials inventory” describes the supplies used by a company to produce the goods it sells. These materials can be produced by businesses themselves or bought from suppliers. For instance, a bakery might buy the ingredients—like flour, eggs, and sugar—needed to make its baked goods. Additionally, it could grow some of the herbs it uses to flavor these products.
Work-in-progress goods
Work-in-progress inventory applies to businesses that manufacture their products. These products are items that are either incomplete or in the process of being finished but are not yet ready for sale. Work-in-progress products from a soapmaker, for instance, might be soaps that are still in their molds and need to be cut and cured. Those soap bars will eventually be packaged and sold to customers.
Finished goods
Finished goods are items that a company is prepared to sell. These products have either finished production or the company has purchased the finished product and is selling it exactly as it is. For instance, the cakes and cookies that a bakery has for sale displayed are considered its finished goods. The books that a bookstore purchased from suppliers and put on the shelves also serve as finished goods.
FAQ
Is inventory and supplies the same in accounting?
While inventory refers to items a company has made or bought to sell to customers, supplies are the things a company uses to operate and generate revenue. It’s critical that you correctly classify supplies and inventory because doing so has tax repercussions.
Are office supplies considered inventory?
It’s important to keep office supplies separate from inventory expenses. Inventory is always considered an asset since it’s not consumable. Office expenses: Typically, office expenses are recorded as an expense rather than an asset, including office supplies.
Are supplies and inventory assets?
The inventory supplies account, which is part of the collection of inventory accounts, is typically where supplies that are classified as assets are kept. If so, supplies show up in the balance sheet’s “inventory” line item.
What is the difference between supplies and materials?
In the manufacturing industry, supplies and materials are occasionally used synonymously. Supplies are frequently used to refer to non-manufacturing items, whereas materials are those that will be used to create items.
