What Is the Difference Between Supplies & Inventory?
As you do your bookkeeping, especially working with documents such as a balance sheet, you want to get your entries correct so your banker or tax preparer using standard business accounting terms can quickly find the information she needs. Supplies and inventory are two expenses and assets you have: Supplies are items you use to run your business or make your product, and inventory refers to goods you’ve made or purchased for sale.
Supplies fall into two categories: those for running your company and those for making your product. The former type of supplies includes office items such as paper, toner, binders, stationery and pens. Supplies for making your product could include materials and chemicals for manufacturing or food and condiments for a restaurant. Many restaurants informally refer to food supplies as inventory, but this is not an accounting use of the term. Unlike equipment such as a copier, computer or machinery, supplies have a short, finite life and are exhausted when they are used for their purpose.
When you’ve made a product and have it on hand to sell, you have created inventory. Many companies make product only after they have received an order, while others make inventory in advance so it’s ready to quickly ship when an order comes in. In the latter scenario, the inventory is an asset because you own it and have received no payment for it. If you have sold a product, it’s not inventory, even if it’s sitting in your warehouse, because you’ve recorded the receivable or payment as an asset. If you sell products other companies make, as a retailer does, your inventory is the product you’ve purchased for resale.
Supplies and unsold inventory are assets. When you purchase them, you record the purchase of office supplies as part of your overhead expenses and supplies for making product as part of your manufacturing or production budget. The words “supplies” and “materials” often are used interchangeably in manufacturing, while some companies use the term “supplies” for non-manufacturing items and “materials” to describe manufacturing items.
Using the just-in-time method of making and selling products, some companies order supplies and make products only when they are needed to fill orders or just before managers believe they will receive orders. If a company orders materials and makes inventory to stock for later sale, this might increase labor costs in a recording period other than the period in which the inventory is sold. It can increase interest payments as the inventory sits. You also take the chance of not being able to sell your inventory if you make it without an order, but you can depreciate it if it loses value.