Within the standard double-entry accounting system, a company’s ledger must always be in balance by having a record of two entries that cancel each other out.
For instance, to purchase an ergonomic chair worth $500, you will have to credit your cash account, but to comply with the rules of the double-entry accounting system, you must also debit the same amount to another expenses-related account.
We take a closer look at this system in the sections below!
What Are Expenses in Accounting?
Еxpenses are the operational costs of a company incurred in the process of generating revenue. Put bluntly, expenses are the money you spend to make money.
Some everyday operating expenses include payments for office supplies, location leases, employee wages, etc. However, companies must also pay non-operating costs unrelated to the brand’s core activities, such as interest charges.
When it comes to recording expenses, accountants either do it on a cash basis or an accrual basis. While the former method registers each expense when paid, accrual accounting does it when these expenses are first incurred.
That said, most businesses use the accrual accounting method. So even if services or products are yet to be received, expenses would be registered.
What Is an Expense Account?
Expense accounts are records of the different types of expenses a company regularly covers for a specific period. Therefore, on most occasions, these accounts are temporary and last for the duration of a month, quarter, year, etc.
Businesses tend to keep several expense accounts categorized by type:
- Purchase payments
- Cost of sales
- Transport costs
- Ad expenses
- Bank costs
- Depreciation expenses
- Insurance payments
- Interest costs
- Expenses for rent and utilities
- Salaries expenses
- Supplies costs
- Fees for licenses and taxes
- Costs for employee training
- Legal and accounting fees
Once all of these expenses are calculated, accountants deduct them from the overall company revenues to estimate the business’s net income.
Why Are Expenses Debited?
Per the double-entry accounting system, every accounting transaction is recorded in and impacts two balanced accounts: debit and credit. Debit entries represent everything that comes in, whereas credit entries everything that goes out.
Following that logic, debit entries increase asset and expense accounts or decrease liability and equity accounts since money is coming in.
On the other hand, once recorded, credit increases the liability and equity accounts and decreases the asset and expense accounts.
In other words, the owner’s equity will be reduced by the same amount they spend on expenses. However, since equities belong in a credit account, the related expenses must be recorded in the debit one, thus balancing both accounts.
How Are Expenses Debited?
As mentioned above, each debit entry must have a corresponding credit entry, so debiting some accounts means crediting other related accounts for the same sum.
In a double-entry accounting system, debits are always recorded in the left column, while credits are recorded in the right. For example, when purchasing supplies for cash, accountants will debit the supplies expenses account by entering the sum spent on the left before entering the same sum in the opposite column of the cash account.
By doing so, they ensure that the books are always kept in balance. However, several entries may sometimes be necessary for this balance to be achieved.
For instance, if you spend $200 on food that you got from your cash ($100) and loans payable account ($100), you will have to debit your expenses account with $200 but record two other entries: one in the cash account and another in the loans account.
In general, companies use the double-entry accounting system to keep track of everything that comes in and goes out of their ledgers. Therefore, whenever money is spent on something, the expense must be recorded as a debit entry in the expenses account while the same amount is credited from a related cash account. Simply put, the owner’s equity is credited as it is reduced by the expense, which is debited.