The balance in the supplies account before adjustment at the end of the year is $868. The proper adjusting entry if the amount of supplies on hand at the end of the year is $263 would be:

The adjusting entry would be:

Dr Supplies Expense or COGS $605

Cr Supplies or inventory account $605

Explanation:

The reason is that the inventory in hand is $263 whereas in the account is $868 which means the inventory must be reduced to $263 because the entry is wrongly passed in the system. So what we will do is decrease the inventory account by $605 ($868 - $263). This means entry must reduce inventory which is debit in nature and decrease in inventory must be then credited. The other entry would be a debit to cost of goods sold because the inventory sold must form part of the cost of goods sold so it must be debited.

The entry is:

Dr Supplies Expense or COGS $605

Cr Supplies or inventory account $605

Note the supplies expense account or cost of goods sold are terms interchangeably used in accounting.

Likewise supplies account and inventory account are also interchangeable terms.