Basic Financial Statements
Double Entry Accounting
Revenues and Expenses
To illustrate the concept of double entry accounting related to revenues and expenses, consider an example of a company that sells a service for which the owner charges and receives $300. The journal entry to record the transaction would be:
The cash the owner receives increases the value of the assets, while the revenue account allows the owner to increase his claim against those assets.
Now suppose that in order to earn that $300 in the above example, the company incurred a utility bill of $100. As the company writes a check, it will make the following journal entry:
In this example, the company has exhausted $100 (an expired asset) and it reduces cash accordingly. The expense is reflected as a contra revenue and reduces the owners claim against the remaining assets of the company. Note that if the utility bill had not been paid, the credit would not reduce cash (the assets have not yet been exhausted), instead, the credit would have gone to a liability (showing that the creditors have a claim of $100 against the company's assets).
To review, the following table shows what might be considered debits and credits.
- Increases in Assets
- Decreases in Claims
- Expense Items
- Decreases in Assets
- Increases in Claims
- Revenue Items