During a company's first year of operations, the asset account, Office Supplies, was debited for $2,400 for the purchases of supplies. At year-end, a physical count of the supplies on hand revealed that $875 of unused supplies were available for future use. How will the related adjusting entry affect the company's financial statements?

1. Expenses will increase and assets will decrease by $1,525.
2. Assets and expenses will both increase by $875.
3. Expenses and assets will both increase by $1,525.
4. The related adjusting entry has no effect on net income or the accounting equation.