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What type of expense is the purchase of propane?

Technically, the purchase of propane is not an expense. Depending on the business, the propane is an asset until it is used, resold, or included in a product that is sold. At that time it will become an expense.

If the purchased propane is used relatively soon, accountants will usually skip recording the asset. Here are three examples of how the expense might be reported on the company's income statement.

Example 1. A service company purchases $900 of propane to heat its office for the following month. Technically the propane is an asset until used. However, the accountant is likely to skip recording of the asset and will record the purchase as a $900 operating expense.

Example 2. A local dealer purchases large quantities of propane and then delivers the propane in small quantities to its customers. The dealer will record the purchase as the asset Propane Inventory. As the propane is sold, the dealer will reduce Propane Inventory for the cost of the propane sold and will increase the expense Cost of Goods Sold.

Example 3. A manufacturer uses propane in its factory operations. The cost of the propane purchased is likely to be recorded as Manufacturing Overhead. Manufacturing Overhead is allocated to the products manufactured and will be part of the products' cost. If the products are in Inventory, those products' costs are assets. If the products are sold, those products' costs will be expensed as Cost of Goods Sold.