Understanding Financial Statements Bizzer Professional Training


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Please review the information below
Double Entry Accounting
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:
Please review the information below
Please review the information below
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


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