Alright, now let's discuss another type of adjusting entry. The adjusting entry for supplies. So, remember when we talked about adjusting entries, we had three types deferrals. Accruals and depreciation. Well, the supplies adjusting entry is still a deferral. Okay. We talked about prepaid expenses before this, which were also a deferral. So let's talk about supplies, the supplies. This is what you would find in the supply closet at the office. Right? If you go into the office, you're gonna see it's full of notepad, staples, paper clips, this and that. All sorts of stuff that get used in the day to day around the office. Right. So you would imagine that we would have some balance in this supplies account. So what do you think? Pop quiz supplies are a an expense, be a liability C an asset or D revenues. Yeah. Good, very good. I'm assuming that you just said supplies are assets. I don't know how you know so much, but you're doing great. Alright. And if you didn't get that, let me explain to you real quick. So, supplies are assets, right? Because these are things that we purchase, We purchase all these office supplies. These note pads and pens, and then we own them. Right? And then we're gonna use them up in our business. So, since we own these supplies, they're an asset to the company. Okay, pretty simple. So, let's see how the supplies has to deal with adjusting entries here. Okay, So just like with prepaid expenses, supplies are gonna have two important dates. All right. We're gonna start here in the blue boxes. And then in the next video, we'll talk about the cash basis to accrual basis in the red boxes. Okay, So let's start with the first important date. And you're gonna notice with pretty much every adjusting entry that we deal with. We're gonna be talking about two dates. Okay? So the first one is where we purchase the supplies. Right? So we pay for the supplies in advance. Right? The cash is happening before the expense and we create the supplies account. Okay? So on November 1st, the company purchases $800 worth of office supplies. Okay. So the entry, they would make Pretty straightforward. They would create supplies, right? They would have an asset for supplies and they would give it a debit of 800 right assets go up with a debit. So supplies now has a balance of 800 and we're going to credit cash for 800, right? We paid for it in cash. So we credit cash 800. Pretty straightforward there. Now let's think about the adjusting entry. So this is a little different from prepaid expenses. Prepaid expenses. We're thinking about the time that's passed and how much of the time we've used up. So we would lower the balance based on that with supplies. We're gonna adjust the supplies account based on the amount of supplies left at the end of the period. Okay. So this is different. What we're gonna do is we're literally gonna go at the end of the period. We're gonna go into the supply closet and we're gonna count. Okay. We've got this many note pads left this many state. Is this much clipboards, this much paper or whatever. And we're going to basically do an inventory of the supplies closet and see what value is left. Okay. So they're gonna have to give you this number, especially when you're when you're taking tests and stuff, you're not going to be. How are you going to know this? They're gonna have to tell you The supplies at the end of the period. Just like I have here, the company notes that $200 worth of supplies are left. So they're gonna tell you what's left. Okay. So the trick here is that that $200 that's left. That should be the balance in the supplies account right? Right now. The supplies account is so Sitting at $800 from when we purchased it, we've used up a bunch of stuff and we've noticed that there's only $200 worth of it left. So supplies should have a $200 balance. Not an $800 balance. Right? So how do we get down from 800 down to 200 800 -200 Is equal to 600, right? So that's basically what we've used up, right? We started with 800 in the supply closet. We used a bunch of it up and we're left with $200 worth. That means we've used up $600 worth. So what we're gonna do is we're gonna have a supplies expense for what we used up supplies expense, and we're going to debit it for 600. Right? So now we've created this expense for 600 and that's the amount of supplies we've used. And now we have to decrease the balance of supplies by the same 600 right to get it to the correct final balance. So, if we think about supplies, it was sitting at 800 - the 600 that we used up gets us to the final balance of 200, which is the correct amount that we counted. Right? How about supplies expense? Well, that's sitting at 600, right? That is the amount that we used up. Cool. Let's pause right here, and then we'll continue with the cash basis to accrual basis of accounting. Alright, let's check that out.

Alright. So here in the red boxes, I want to talk about the cash basis to accrual basis. Cash basis to a cruel. Okay, so technically the blue boxes is like the correct way to do it from the beginning, But sometimes you'll see it happen like we'll do in these boxes. Okay. So from from the other angle, what could happen, the company purchases $800 worth of supplies while they paid for in cash. From a cash basis. We would do something like debit supplies expense for 800. And we would credit cash for 800. Right? We paid for it in cash. We lower our cash balance with the credit and we increase our supplies expense with that debit. Right? So right now that's from a cash basis. We paid for it in cash, all of it sitting in the expense account. Alright, but now let's adjust it to the correct amount on the adjusting date. So they note that $200 worth of office supplies are left. We follow the same logic where we've used up $600 of the supplies, right? We started with 800. Were left with 200. must have been used up. So what is the correct balance in supplies expense? Excuse me? The supplies expense should be at 600. Right, but the supplies expense is currently at 800. So we need to bring it down by 200. Right. So how are we gonna do that? We're going to credit supplies expense. Right. So this is a credit entry. I'm leaving this indented supplies expense for 200. We're lowering the value of supplies expense by 200 to get it to the correct balance of 600. And what about the debit? Well, in this case we don't have a supplies account yet. Right. We never created a supplies account. So that's what we need to debit the supplies account for this 200. That was not used up. Right? So if we look at our final balances down here at the bottom, let me get out of the way Down down here. Underneath the supplies account is now sitting at 200. Right? Because we just debited it for 200 and our supplies expense. Well, it was 800. We took away 200 and it got us to 600. Right? So, notice that in both cases our supplies and our supplies expense end up at the same number. Right? So we end up with the same number in both cases. Either way is technically correct. Okay, so let's go ahead and pause here and move on to the next video