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.
Debits
Increases in Assets
Decreases in Claims
Expense Items
Credits
Decreases in Assets
Increases in Claims
Revenue Items
