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Value Investing - Business and Economic Principles
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Value Investing - Business and Economic Principles
Value Investing - Business and Economic Principles

Guidance and Knowledge for Value Investors

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Bookkeeping - Introduction and Basic Understanding / By David J Hoare MSA / 08/19/2015 03/18/2021

Bookkeeping – Debits and Credits in Expense Accounts (Lesson 8)

This site is dedicated to the investment strategy known as Value Investing. There are over 590 articles on this site about business tenets, principles and standards. During 2020, this site’s Value Investment Fund earned a 35.46% return. All of it was documented in the Value Investing Section. If you want to learn about value investing, click on the Value Investing tab in the header above.

Expense accounts rarely have credit entries posted to them.

Expense types of accounts are the easiest to understand with bookkeeping. In general, only debits are entered in expense types of accounts.

Before delving into the debits and credits for expense accounts, there is some accounting terminology to understand. Terminology related to expense types of accounts. There are several different terms used to describe this section of the income statement (profit and loss statement). 

Expense Accounts – Common Names

The following is a short list of the different names used to say expense accounts:

  • Overhead
  • General and Administrative
  • Expenditures
  • Operating Expenses
  • Management

In more than 90% of all business operations, the most expensive overhead item is the cost of the management team. This is 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 with expenses 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 described above. Now let’s get back to debits and credits.

Expense Accounts – Debits and Credits

As 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 this is referring to here, then please read Lesson 3 explaining ledgers and journals. From above, 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 of lessons, 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 Expenses.

Key Bookkeeping Principle

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 THE ASSET TYPE OF ACCOUNTS.

 

 

With 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, is a simple error made in recording the original transaction. Most bookkeepers use a credit entry to fix the problem.

In summation, if there is any 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 is covered in future lessons. For now, you want to think that expense accounts should only have debit ending balances. This is still in the early stages of learning 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.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

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    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
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      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.4% and year-to-date for the second year it is tracking well over 52%. Lifetime to date, the Fund is 2.8X the return for the DOW and 3.0X the S&P 500.

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    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
      2) Intrinsic Value
      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.46%. The investment fund outperformed the DOW by a factor of 2.9X, 2.6X the S&P 500 and 2.6X the S&P Composite 1500.

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