Logging Inventory for Service Companies
Although discussions of inventory focus on manufacturing and merchandising companies, you also need to consider service companies: those that don’t provide a tangible good and normally don’t have any appreciable inventory. However, if a service company keeps a large amount of office or other supplies on hand, it may inventory them instead of applying the cost of supplies purchased to the supply expense each month.
Suppose a service company purchases supplies on account, which means the company promises to pay for them at a later date. The supplies cost $700 at the beginning of September. The $700 represents purchases. For this example, no beginning inventory exists for September. On the last day of September, an inventory is taken and supplies in the amount of $230 remain in the cabinet.
Your journal entry to record the purchase is to debit supplies (an asset account) and credit accounts payable for $700. So far you haven’t affected the income statement.
Now at the end of the month, you have to adjust supplies inventory to the actual on hand, which involves expensing the portion of supplies used. The company purchased $700 of supplies and only $230 remain, so you know that $700 – $230 = $470 of supplies were used and should be expensed for the month of September.
So your journal entry is to debit supplies expense (an income statement account) and credit supplies (an asset account).