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Why is Rent Expense a debit and Service Revenues a credit?

Author:
Harold Averkamp, CPA, MBA

Why Rent Expense is a Debit

Rent expense (and any other expense) will reduce a company’s owner’s equity (or stockholders’ equity). Owner’s equity which is on the right side of the accounting equation is expected to have a credit balance. Therefore, to reduce the credit balance, the expense accounts will require debit entries.

Example of Rent Expense as a Debit

If a company pays $800 for the current month’s rent, the company’s assets and its owner’s equity will decrease. To decrease an asset such as Cash, the company will credit the Cash account for $800. Since every entry must have debits equal to credits, the company will need to debit another account for $800. In this case, the account is Rent Expense. (Eventually the debit balance in the Rent Expense account will be transferred/closed to the proprietor’s capital account or to a corporation’s retained earnings account.)

Why Service Revenues is a Credit

Service revenues (and any other revenues) will increase a company’s owner’s equity (or stockholders’ equity). Owner’s equity which is on the right side of the accounting equation is expected to have a credit balance. Therefore, to increase the credit balance, the revenues accounts will have to be credited.

Example of Service Revenues as a Credit

If the company earns and receives $300 for providing a service, the company’s assets and owner’s equity will increase. The asset Cash will be increased with a debit of $300. Therefore, another account will need to be credited. In this case Service Revenues will be credited for $300. Service Revenues is a temporary account that will eventually be closed to the owner’s equity account.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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