Double Entry for Expenses and Incomes (Revenues)

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The double-entry for expenses and incomes (revenues) are slightly more complicated as compared to assets, liabilities and capital.

Debit and Credit Rules for Incomes and Expenses Entries:

Every transaction results in a debit entry in one account and a credit in another. This rule always applies irrespective of the nature of accounts involved and whether the accounts increase or decrease.

The word ‘debit’ has Latin origin and means ‘to receive’ or ‘value received’. It follows that assets and expenses are debited as they represent either the value received or to be received. Both assets and expenses are expenditures of the business but the main difference is that benefit from expenses has been received whereas benefit is to be received from the amount spent on assets.

The word ‘credit’ also has Latin origin and means ‘to give’ or ‘value given’. It follows that liabilities and incomes are credited as they either arise due to the value (services/goods) given or to be given.

Increase in expenses is represented by a debit entry. As expenses reduce the equity (capital) so opposite rules for debit and credit are applied for expenses to those applied for capital. On the other hand as revenues and profits increase the equity (capital) so both capital and revenues (incomes) have same rules of debit and credit.

The logic of these rules may well be related to the location of these items in the fundamental accounting equation.

We know that incomes (revenues) increase equity and expenses decrease equity. As equity on the right side of the fundamental equation so increase in an income account is recorded on the same (credit/right) side of the “T-account”.

Conversely, as expenses decrease equity, so increase an expenses decrease equity, so increase an expense account is recorded on the opposite (left/debit) side of the “T-account”.

Most transactions posted to revenue, liability and equity accounts are credits. Most transactions posted to expenses and assets accounts are debits. However, we know that, in double-entry accounting system, at any point of time the cumulative effect of all the transactions on both debit and credit sides is same.