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Why are expenses debited?

Author:
Harold Averkamp, CPA, MBA

Why Expenses Are Debited

Expenses cause owner’s equity to decrease. Since owner’s equity’s normal balance is a credit balance, an expense must be recorded as a debit. At the end of the accounting year the debit balances in the expense accounts will be closed and transferred to the owner’s capital account, thereby reducing owner’s equity. (At a corporation, the debit balances in the expense accounts will be closed and transferred to Retained Earnings, which is a stockholders’ equity account.)

Example of Why Expenses Are Debited

To illustrate why expenses are debited, let’s assume that a new company has only one asset, Cash of $10,000, and its owner’s equity is $10,000. The company then pays $500 for advertising that occurs at the time of payment. The company must reduce its Cash (which has a debit balance of $10,000) by entering a credit of $500. To comply with double-entry accounting, the company must record a debit of $500, which will be entered in Advertising Expense. Let’s also assume this was the only transaction for the year. As a result, the company’s balance sheet will report assets of $9,500 and owner’s equity of $9,500. As you can see, there are two reasons why Advertising Expense had to be debited:

  • The transaction required a credit to Cash since this asset account is being reduced. Therefore, there must also be a debit recorded in another account, namely Advertising Expense.
  • The owner’s equity and liabilities will normally have credit balances. Since expenses reduce owner’s equity, Advertising Expense must be debited for $500. Therefore, double entry requires that another account must be credited for $500. Since cash was used, the account Cash will be credited. This is logical since this asset’s normal debit balance must be reduced.
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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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