What Effect Does Purchasing Office Supplies With Cash Have on the Accounting Equation?

Each financial transaction you record as a journal entry has an affect on the accounting equation that shows the financial status of your company at a given time. Cash has a place in the accounting equation as an asset. The supplies expense account has a place in the accounting equation as a subaccount of equity.

The accounting equation is assets equal liabilities plus equity (assets=liabilities+equity). The equity account is sometimes called the capital account, stockholder's account or owner's equity account. Equity is what the owner of the company owes or owns. The owner can be an individual, partners, a group or stockholders. You transform the office supplies expense account three times before you add its value to the accounting equation by combining the value with the equity account balance. First, you record the journal entry; second, you close the journal entry to the income statement; third, you close the income statement to the equity account.

When you buy office supplies for your company, the purchase affects the supplies expense account (equity subaccount) and the cash account (asset). Record the purchase by increasing the supplies expense account with a debit and decreasing the cash account with a credit.

Close the expense account into the income statement at the end of a fiscal year or accounting period. You close the account by offsetting the account balance with an equal opposite entry. The normal balance for the supplies expense account is a debit balance. So you close the account with an equal credit balance to zero out the supplies expense account. Then you debit the income statement to move the supplies expense account balance to the income statement.

The income statement shows whether your company made a profit or loss and is also called the profit or loss statement and the revenue and expense statement. You close expenses -- including the supplies expense account -- and revenues into the income statement. Expenses are money you spend to run your business. Revenues are what your company earned.

If your income statement shows a higher debit balance (expenses), your company is showing a loss. If the income statement shows a higher credit balance (revenues), your company is showing a profit. Subtract the income statement debit (expense) from the credit (revenue). Offset this entry with an opposite matching entry to close the income summary statement into the equity account. I