| Understanding
Financial Statements |
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Double
Entry Accounting
Revenues
and Expenses
The concept of revenues and expenses is often a little more difficult
to understand when first examining the double entry accounting system.
One reason for this difficulty is the fact that revenues are treated
as credits while expenses are
treated as debits. This concept
often seems contrary to the logical notion that revenue means more
money; and more money means more assets. Additionally, the term
expenses logically means a drain on one's assets, therefore, it
must mean a payment to creditors. Perhaps when we examine the illustration
below, the rationale will seem a little more clear.
Recognize, as you examine the illustration, that the assets
of a company represent everything that has value, e.g., the cash,
the fixtures, the intangibles; everything. These assets are subject
to claims by the creditors and the owners. Revenues, however,
allow the owners to seek a higher claim in the assets because
their profits have increased. Therefore, think of revenues as
credits that increase the owner's equity. Alternatively, expenses
are expired assets (as defined by the accounting principles board).
They represent contra revenues and reduce the amount of profit
to which an owner lays claim.
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| Copyright ©
1998 Bizzer Professional Training |
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