State BPA Fundamental Accounting Practice Exam

What type of account is Supplies Expense considered?

1. Asset

2. Equity

3. Expense

4. Liability

The correct answer is: Expense

Supplies Expense is classified as an expense account because it represents the costs related to supplies that have been consumed during a specific accounting period. In the context of accounting, expenses are outflows of resources that occur in the process of generating revenue. They are essential for understanding a company's profitability. When supplies are purchased, they are initially recorded as an asset, known as supplies (or supplies inventory). However, once these supplies are used, the cost is then reclassified from the asset account to the Supplies Expense account. This reflects the consumption of resources during a period, which directly impacts net income on the income statement. The correct classification as an expense also aligns with the matching principle in accounting, which states that expenses should be recognized in the same period as the revenues they help to generate. By accurately categorizing supplies expenses, one can analyze financial performance and make informed decisions about resource allocation and budgeting.