Before I delve into the debits and credits for expense accounts I first want the reader to understand some accounting language. The key to all of this is the terminology related to expense types of accounts. You see, there are several different terms used to describe this section of the income statement (profit and loss statement). The following is a short list of the different names used to say expense accounts:
- General and Administrative
- Operating Expenses
In more than 90% of all business operations, the number one expense is the cost of the management team. I’m referring to their compensation which includes salaries, benefits, payroll taxes etc. In addition the front office administration costs are also included, even the wages paid to the bookkeeper. The second most expensive line item in this type of account is facility costs. Facility costs comprise rent, maintenance, real estate taxes and others. Other forms of expenses include:
- Sales and Marketing
- Insurance – general liability, auto, property, umbrella etc.
- Transportation – often this expense is a function of cost of sales
- Communications – phone, cell phones, internet, radio, GPS systems
- Office – supplies, office technology, software
- Utilities – water, sewer, electricity, gas (sometimes theses expenses are included with facilities)
- Professional Fees – legal, outside accounting, consulting
- Taxes – property, revenue, licenses
- Depreciation – sometimes depreciation is included in cost of sales types of accounts depending on the nature of the business
- Other – banking, meals and entertainment, travel, training & miscellaneous
The goal for the reader is to understand that these expenses can be grouped under the various terms I described above in terminology. Now let’s get back to debits and credits.
As I explained in Lesson 2, the dual entry system used in bookkeeping uses debits and credits to ensure balance in the books. Expense accounts receive their debits mostly from two respective journals. If you are unsure of what I am referring to here, then please read Lesson 3 explaining ledgers and journals. From above I explained that the primary expense in the overhead section (expense types of accounts) is management payroll. Therefore the payroll journal is one of the primary sources of the debits that are posted to the expense ledgers. The secondary journal is of course the purchases journal. For those of you following this series you should immediately realize that journals can feed information to different types of accounts. For example, the purchases journal feeds information to Cost of Sales and to the Expenses.
Journals are used to record economic transactions in chronological date order. The journals record both the debit and the credit. Both sides of the entry are then transferred to the respective ledger (account) for final posting. Journals act as sources of information and feed debits and credits to more than one type of an account. As an example, the payroll journal feeds entries to cost of sales, expenses, liabilities, and to asset types of accounts.
In regard to expense accounts, they will always end in debit balances. It is rare, very rare for even a credit entry to be posted to an expense account. Credits do happen and are most often a function of some type of purchase return to a supplier or a vendor providing a credit related to services rendered. The following are some examples of credits posted to expense accounts:
1) Often banks will subtract or take back a fee charged to their client for relationship purposes. In this case the cash account increases via a debit and the expense account – banking fees – is issued a credit reducing the overall total bank fees.
2) Another common credit posted to expense accounts are refunded over-payments for different types of expenses. A good example of this are tax over-payments. The government returns the over-payment to the business and just as in the banking example above, cash is debited for the value and the respective tax expense is decreased via a credit to that account.
3) A third and also common credit for expense accounts are simple errors made in recording the original transaction. Most bookkeepers use a credit entry to fix the problem.
In summation I want to address the concern or possibility of having an ending credit balance for an expense type of account. The answer is ‘YES’ it can happen. This is an advanced bookkeeping function which I cover in future lessons. For now I want you to think that expense accounts should only have debit ending balances. I am still in the early stages of teaching you about bookkeeping so for you it is still straight forward – Expense Accounts Should Have Debit Balances and Entries, Credit Entries Can Exist But Are Rare. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.