 Supplies is an example of a deferral adjusting entry. It occurs when cash is paid before supply's expense is incurred. Let's look at an example. Assume on January 1, Morrissey purchases recording studio supplies for $2,000. Let's answer the following questions. What is the journal entry on January 1? Is this an adjusting journal entry? What are the balances on the unadjusted trial balance for supplies and supplies expense? The journal entry on January 1 is a debit to the asset account supplies and a credit to the asset account cash for $2,000. This is not an adjusting entry because there's an underlying transaction that happened on January 1. So the unadjusted trial balance for supplies at the end of the month is still $2,000. As of yet, no supply expense has been recorded. Let's assume that $1,500 of supplies were used up during the month. What is the adjusting entry on January 31st? Well, the adjusting entry on January 31st is a debit to the expense account supplies expense and a credit to the asset account supplies for $1,500. At the end of the month, Morrissey has used up $1,500 of a supplies asset. When we use up assets, we create expense. So now the account balances are correct. The asset supplies has an adjusted balance of $500 and the expense account supplies expense has a balance of $1,500 for January. Okay, sometimes we might face a question where the amount of supplies used is not given to us. For example, the question might have been phrased this way. Assume that Morrissey has $500 of supplies on hand at the end of the month. How much supplies have been used? Using our T account, we can see that we had $2,000 of supplies available at the beginning of the month and now we only have 500 remaining. So we must have used $1,500 of supplies. Once we know how many supplies were used up, we can record the adjusting journal entry and post them to the ledgers to arrive at the correct balances for supplies and supplies expense.