Assume that a company has purchased some supplies during a month. When it bought the supplies, it recorded a reduction in cash, and an increase in an asset called supplies. At the end of the month, what entry, if any, should be recorded using accrual accounting to reflect the fact that half of the supplies have been used up?
A) No entry is needed, since no cash payment is being made at the end of the month.
B) An entry reducing the supplies asset, increasing an expense, and decreasing equity
C) An entry reducing the supplies asset, increasing a liability, and not changing equity
D) An entry reducing the supplies asset, decreasing an expense, and reducing equity

Question

Quizplus · Accepted Answer

Accrual accounting requires that expenses be recorded in the period when they are incurred, regardless of when they are paid for. In this case, since half of the supplies have been used up, an entry should be made to reduce the supplies asset and increase an expense account (such as supplies expense or cost of goods sold). This will decrease equity since expenses reduce net income. Option A is incorrect because while no cash payment is made, an adjustment still needs to be made to properly reflect the expenses of the period. Option C is incorrect because there would be no reason to increase a liability account in this case. Option D is incorrect because it suggests decreasing an expense account, which is not appropriate when supplies have been used up during the period.

Assume That a Company Has Purchased Some Supplies During a Month