While they certainly fall into the asset category, which is anything of value that you own, office supplies are purchased for consumption, making them more of a business expense than a current asset.
But because this involves accounting, there are exceptions to that rule. When there is an exception, it would likely fall into the office expense or office equipment category. We’ll explain a little bit about each of these categories and how to properly classify these expenses on your financial statements.
Are office supplies an asset or an expense?
Managing an office seems like a pretty straightforward job. But things can be confusing when you’re trying to classify regular office expenses properly. For example, let’s say Sara buys staplers, staples, paper for the copier, and a laptop computer for one of her employees. Sara would need to record the cost of the staplers, staples, and paper as an office supplies expense, while the laptop would be considered an asset.
Introducing office expenses makes this process even more confusing. What makes an office expense different from office supplies? Is a calculator considered office supplies or office equipment? Let’s take a look at all three business expense categories and how to classify them properly.
- Office supplies: Office supplies are small purchases that are needed for you and your employees to be able to do their jobs. Office supplies expenses include items such as staples, paper, ink, pen and pencils, paper clips, binders, file folders, and markers. All of these items are 100% consumable, meaning that they’re purchased to be used. While they are an asset because they hold value, they are not recorded as an asset but are recorded as an expense. It’s important to keep office supplies separate from inventory expenses. Inventory is always considered an asset since it’s not consumable.
- Office expenses: Office expenses, like office supplies, are typically recorded as an expense rather than an asset. Office expenses are often intangible and include things such as janitorial services, software subscriptions, office maintenance, and even website maintenance.
- Office equipment: Office equipment, unlike both office expenses and office supplies, is usually recorded as an asset and expensed over an extended period rather than expensed immediately. Office equipment includes desktop and laptop computers, other electronic devices, office machinery such as a printer or copier, and furniture and fixtures used to furnish your office. While many businesses use a dollar amount as a threshold for classifying these purchases as equipment, the IRS made a change in 2016 that allows business owners to take an immediate deduction for the entire cost of any business asset that is less than $2,500, although you still have the option to classify these expenses as a long-term asset.
If you purchase office supplies in bulk, you can classify them as an asset and expense them as they’re used. But, in most cases, offices buy enough supplies to last them for a few weeks or a month, so classifying them as an asset is not necessary.
How to classify office supplies, office expenses, and office equipment on financial statements
When classifying supplies, you’ll need to consider the materiality of the item purchased. In other words, if the item does not have a large impact on your financial statements, you can choose to simply expense it. The materiality principle states that if an expense represents more than 5% of your total assets, it should be recorded as an asset rather than an expense.
The easiest way to classify office supplies, expenses, and equipment is to look at each purchase separately and decide how it should be classified.
For example, Tim’s company made the following purchases in October 2020:
- A box of 12 pens for $5.99
- Three reams of paper for $15.95
- Two boxes of staples for $6.50
- A box of file folders for $4.25
- A subscription for a new accounting software application, which costs $25 monthly
- A cleaning team to deep clean the office for $150
- A new color laser printer for $1,095
- A new copier for $3,000
Now let’s classify each expense in the proper category.
Classifying office supplies is easy. Looking at the above transactions, the following would be considered office supplies:
- Pens for $5.99
- Paper for $15.95
- Staples for $6.50
- File folders for $4.25
The total of these purchases is $32.69 and would be recorded in your accounting software or manually in your general ledger like this:
If these supplies were purchased on account, you’d have to first record the purchases in accounts payable.
You would then adjust your payables account when you pay the bill.
Tim’s transactions that need to be classified as office expenses include the following:
- Software subscription for $25
- Deep cleaning the office for $150
Both of these expenses were paid immediately and did not have to be entered in accounts payable, so they would be recorded as follows:
Tim made two office equipment purchases.
- Color laser printer for $1,095
- A copier for $3,000
Tim can choose to record both of these as assets, or he can choose to expense the printer immediately since it’s less than $2,500 and only record the copier as an asset. He chooses to expense the printer. Here is the journal entry that needs to be made to record the printer purchase.
However, Tim still needs to record the purchase of the copier, which is a fixed asset.
|10-31-2020||Fixed Assets — Copier||$3,000|
Since the copier is being depreciated, Tim will need to record the depreciation expense as well. Tim determines that the salvage value of the copier will be $300, and it will be depreciated over three years using the straight-line method.
($3,000 - $300) ÷ 3 = $900 yearly depreciation
$900 ÷ 12 = $75 per month depreciation expense
When recording a purchase as an asset, be sure to record both the purchase and the depreciation expense.
4 best practices for correctly classifying your office supplies
If you’re still confused about how to correctly classify your office supplies, there are some best practices you can follow.
1. Decide if it’s consumable
Paper, pens, pencils, and the like are all consumable items. Unless you buy a year’s worth of these items, they should all be expensed at the time they are purchased.
2. Determine how quickly it will be used
Related to the consumable question, you can look at how quickly you will consume an item before determining how to classify it. For example, if you contract services for a cleaning company that is paid monthly, that should be recorded as an office expense. But if you purchase cleaning services and prepay them a year in advance, you’ll need to record them as a prepaid expense and expense them monthly.
3. Consider the cost
IRS rules allow you to expense any equipment or machinery in its entirety if it costs less than $2,500. However, the option remains for you to expense that item over an extended period if you wish. In many cases, small businesses will establish an internal cut-off point, which can be helpful when trying to determine whether to immediately expense an item or not.
If the item purchased will significantly impact your financial statements, it will need to be recorded as an asset. For example, a company with a small number of assets will have a lower threshold for purchases than one that has a higher number of assets.
Office supplies are valuable, but probably not an asset
Unless you purchase in bulk for the upcoming year, your office expenses will simply be office expenses. While things can get a little confusing when trying to determine exactly how to classify a particular item, such as a $500 laptop or a small, desktop printer, it’s ultimately up to you to determine whether you want to classify the purchase as an asset or whether it’s just an office expense.
Remember that these transactions will impact both your balance sheet and your income statement, so it’s important to record them properly.