Is An Expense Account A Debit Or Credit?

Before we explain and illustrate the debits and credits in accounting and bookkeeping, we will discuss the accounts in which the debits and credits will be entered or posted. Expenses decrease stockholders’ equity (which is on the right side of the accounting equation).Therefore what is cost incurred expense accounts will have their balances on the left side. Revenue accounts record the income to a business and are reported on the income statement. Examples of revenue accounts include sales of goods or services, interest income, and investment income.

To accurately enter your firm’s debits and credits, you need to understand business accounting journals. A journal is a record of each accounting transaction listed in chronological order. Simply put, balancing a business’s books involves recording how money flows in and out of the business and ensuring the entries “balance” each other out.

What Are Debits (DR) and Credits (CR)?

Since that money didn’t simply float into thin air, it is important to record that transaction with the appropriate debit. Although your cash account was credited (decreased), your equipment account was debited (increased) with valuable property. It is now an asset owned by your business, which can be sold or used for collateral for future loans, for instance. Debits and credits form the basis of the double-entry accounting system of a business. Debits represent money that is paid out of an account and credits represent money that is paid into an account. Each financial transaction made by a business firm must have at least one debit and credit recorded to the business’s accounting ledger in equal, but opposite, amounts.

  • That item, however, becomes an asset you now own as part of your equipment list.
  • Double-entry, on the other hand, allows you to see how complex transactions are balanced across many different facets of your business, such as inventory, depreciation, sales, expenses etc.
  • For example, paying with a company credit card rather than requesting reimbursement through an expense account could result in lower transaction fees or better rewards programs.
  • If you are not familiar with debits and credits or if you want a better understanding, we will provide a few insights to help you.
  • Using an expense account can bring significant benefits to businesses of all sizes.

The most important thing to remember is that when you’re recording journal entries, your total debits must equal your total credits. As long as you ensure your debits and credits are equal, your books will be in balance. A credit entry increases liability, revenue or equity accounts — or it decreases an asset or expense account. You can record all credits on the right side, as a negative number to reflect outgoing money.


Hence, asset accounts such as Cash, Accounts Receivable, Inventory, and Equipment should have debit balances. We will use the accounting equation to explain why we sometimes debit an account and at other times we credit an account. If you already understand debits and credits, the following table summarizes how debits and credits are used in the accounts. The double-entry system requires both debit and a credit entries. When these two items balance out — or equal zero — on your balance sheet, your books are balanced. The costs paid by a business in order to generate revenue are called expenses.

An explanation is listed below the journal entry so that the purpose of the entry can be quickly determined. Furthermore, expense accounts enable businesses to easily identify areas where costs could be reduced or eliminated altogether. By analyzing the data recorded in these accounts, management teams can pinpoint inefficiencies in processes or procedures and find ways to streamline them. Using an expense account can bring significant benefits to businesses of all sizes. For one, it allows for easy tracking and organization of expenses incurred by employees during business operations.

How Do You Record Debits and Credits?

This process involves checking if all transactions are included correctly in both systems while identifying any discrepancies between them. In fact, the accuracy of everything from your net income to your accounting ratios depends on properly entering debits and credits. Taking the time to understand them now will save you a lot of time and extra work down the road. Kashoo offers a surprisingly sophisticated journal entry feature, which allows you to post any necessary journal entries. General ledger accounting is a necessity for your business, no matter its size.

Revenue Accounts

Cash is an asset account, so an increase is a debit and an increase in the common stock account is a credit. It has increased so it’s debited and cash decreased so it is credited. In an accounting journal, debits and credits will always be in adjacent columns on a page. Entries are recorded in the relevant column for the transaction being entered. Your decision to use a debit or credit entry depends on the account you are posting to, and whether the transaction increases or decreases the account. The number of debit and credit entries, however, may be different.

Now you make the accounting journal entry illustrated in Table 2. A business owner can always refer to the Chart of Accounts to determine how to treat an expense account. The information discussed here can help you post debits and credits faster, and avoid errors.

Asset, liability, and equity accounts all appear on your balance sheet. Revenue and Expense accounts appear on your income statement. Income statement accounts primarily include revenues and expenses.

In other words, equity represents the net assets of the company. The formula is used to create the financial statements, and the formula must stay in balance. Before getting into the differences between debit vs. credit accounting, it’s important to understand that they actually work together. If a company pays the rent for the current month, Rent Expense and Cash are the two accounts involved. If a company provides a service and gives the client 30 days in which to pay, the company’s Service Revenues account and Accounts Receivable are affected. The rules governing the use of debits and credits are noted below.

To credit an account means to enter an amount on the right side of an account. If you are really confused by these issues, then just remember that debits always go in the left column, and credits always go in the right column. On October 1, Nick Frank opened a bank account in the name of NeatNiks using $20,000 of his own money from his personal account.

You might notice there is no minus sign on the debit side of the Capital Contributions category. I’m also including a link to our tutorial page that you may find handy. This includes short video tutorials of all sections of QuickBooks. In this case, we’re crediting a bucket, but the value of the bucket is increasing. That’s because the bucket keeps track of a debt, and the debt is going up in this case.

Your bookkeeper or accountant must understand the types of accounts you use, and whether the account is increased with a debit or credit. To define debits and credits, you need to understand accounting journals. Do you find yourself wondering whether to debit or credit those expenses in your accounting system?