Understanding Financial Statements Bizzer Professional Training


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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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