Is Expenses a Debit or Credit? Z

Is Expenses a Debit or Credit?

Did you ever wonder if is expenses a debit or credit? Then you are in the right place, I will help you to clarify this doubt.

The objective of this blog is to provide knowledge about the main elements regarding the nature of the accounts, which are an integral part of the various financial statements.

Identify and explain when an accounting account is of a debtor nature or when it is a creditor, so you can know the importance of their identification when making the corresponding accounting records and can understand why an account increases or decreases its balance.


Is expenses a debit or credit?

I understand that you will want a right-away answer so the answer to this question is debit but why? To understand why the expenses is a debit, first, we have to start from the beginning and understand what an account is.

Account Definition

We can define the T account as the graphical representation of the accounting accounts with their different elements, which are described below:

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As we can see in the proposed scheme, each of the elements or parts that make up the account, namely:

1. Account name,
2. Account code,
3. Left side: Opening balance and debit or debit of the account,
4. Right side: Credit balance and credit or credit of the account,
5. Account balance

Account Classification

Accounting accounts can be classified into three large groups, the same ones that also have their own elements, and we can classify them by the following characteristics:

1. According to the group to which they belong,
2. By its nature, and,
3. According to the balance in which they are presented.

According to the group to which they belong


•    ASSETS: These are the goods and rights owned by the company.
•    LIABILITIES: These are all obligations to third parties.
•    EQUITY: These are the obligations of the shareholders.
•    INCOME: Reflect on the obtained benefits.
•    EXPENSES: These are all those payments that will not be recovered.
•    COSTS: Necessary goods for production.

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By its nature

When making an accounting record, it is essential to know and understand why an account increases or decreases its balance.

From the point of view of the balance that they present, this can be of a DEBTOR or CREDITOR nature.

Asset accounts are a debtor in nature. This means that they increase their balance when they are given a debit and, on the contrary, their balance is reduced when credited.

Liability accounts are credit-bearing in nature, meaning they increase in balance with credit and decrease when a debit is given.

The capital or equity account is of credit origin and therefore the balance of the account will increase each time this account is credited and will decrease each time debit is made.

Income is of credit origin, its balance increases when the account is credited and decreases when there is a debit.

Both costs and expenses are of a debit nature and therefore increase your balance each time debit is given and decrease your balance when credited.

As we can see, understanding the nature of accounting accounts is quite simple and is one of the things that every accountant needs to know. It is also important to mention that the nature of the accounts is also known as the debit and credit theory.

According to the balance in which they are presented

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Account operating system

The charge and credit system established for Asset accounts is as follows, from which it can be deduced that they will always have a debit balance:
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The charge and credit system established for Liability accounts is as follows, from which it can be deduced that they will always have a credit balance:

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The charge and credit system established for the Patrimony accounts is as follows, from which it can be deduced that they will always have a credit balance:

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Since expenses and losses constitute a decrease in Net Assets, your accounts will always have a debit balance:

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Since income and benefits constitute an increase in Net Assets, your accounts will always have a credit balance:

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Basic Accounting Terms

Accounting

It is a means to collect, record, classify, systematize, analyze and present in monetary terms the transactions and events that totally or partially have a financial nature, for which it can be called the language of business or financial decisions.

It is also important to clarify that accounting must provide clear, reliable information that allows us to arrive clearly at the interpretation of the Financial Statements and for this, it is necessary to highlight in a special way the activity of the accountant who must comply with irrevocable rules of conduct such as honesty, business ethics, that reports must be made clearly and accurately.

The financial statements, whose preparation and presentation are the responsibility of the administrators of the entity, are the main means of supplying accounting information to those who do not have access to the records of an economic entity. Through a formal tabulation of names and amounts of money derived from such records, they reflect, at a cut-off date, the collection, classification, and final summary of accounting data.

What is it for?
It serves to record all the operations carried out in the company following chronological order and applying mandatory standards.

Accounting is a key tool to know what situation and conditions a company is in at any time and, with this information, to be able to make the necessary decisions to improve its economic performance.

Performing a correct accounting serves internally for management and administration decision-making and externally so that anyone interested in knowing the progress of the company can do so, in the case of shareholders, suppliers, etc.

Description and dynamics of asset accounts

Savings: represents the inflows and outflows of money from the company.
•    It is debited for: Cash sales, payment of portfolio, payments for loans made to partners or workers, for loans made by partners or third parties.
•    It is credited for: Cash purchases, cash payments to suppliers, payments to third parties, for loans to partners or employees.

Banks: represent the inflows and outflows of money through a financial entity or corporation, where a current account is held, whether in national or foreign currency.
•    It is debited for: Appropriations made directly by the clients or by the company, for a loan granted by the entity where the account is held.
•    It is credited for: Checks drawn, purchase of checkbook, banking services, overdraft interest, and virtual transactions.
Debtors: represents the debts that third parties have in favor of the company, which are payable, such as customer debtors, advance payments of taxes and contributions, advance payments to suppliers, accounts receivable from workers, sundry debtors, and income receivable.
•    It is debited for: Sales on credit to customers, loans to partners or workers, advances to suppliers, for discounts in favor of the company.
•    It is accredited by: Payments and refunds made by clients, partners, and workers, crossing with the income statement.

Merchandise Inventory: represents the stock of merchandise that the company has available for sale.
•    It is debited for: The acquisition of new merchandise, for sales returns, or for the registration of the final inventory as of December 31 with the fiscal closing, in the companies that carry their inventories through the periodic system.
•    It is credited for: The sale of merchandise, for returns on purchases, or for the cancellation of inventory at the beginning of the period with the fiscal closing on December 31, in companies that carry their inventories through the periodic system.

Plant and Equipment Property: represents all the assets that the company has for its use, such as land, constructions and buildings, machinery and equipment, furniture and fixtures, office equipment, computer and communication equipment, fleet, and transportation equipment.
•    It is debited for: The acquisition of new goods, or for improvements that prolong the useful life of the good.
•    It is accredited for: The sale of the goods because they are written off when they are in good condition or damaged.

Description and dynamics of liability accounts

Financial obligations: represents the debts that the company has with the financial sector, such as bank overdrafts, promissory notes, letters of credit, and mortgages, whether in national or foreign currency.
•    It is credited for: The creation of debt with the financial sector, for bank overdrafts, promissory notes, letters of credit, and mortgages, whether in national or foreign currency.
•    They are debited for: The payment or installment of the debt with the financial sector, for bank overdrafts, promissory notes, letters of credit, and mortgages, whether in national or foreign currency.

Suppliers: represents the debts that the company has with the companies that supply the merchandise for sale or the raw material on credit.
•    It is credited for: The purchase on the credit of merchandise for sale or raw material.
•    They are debited for: Payment or credit to the account, or return of raw material or Merchandise, for a discount.

Accounts payable: represents the debts that the company has with third parties other than financial entities and suppliers, such as costs and expenses payable, withholding at source, sales tax withheld, payroll withholdings and contributions, and various creditors.
•    It is credited for: In the acquisition of goods and services on credit such as financial expenses, legal expenses, books, subscriptions, newspapers and magazines, commissions, fees, technical services, maintenance services, leases, public services, representation expenses, and public relations, in discounts for withholdings at source and withheld sales tax, industry and commerce tax, withholdings and payroll contributions such as contributions to the Compensation Fund, Pension, and Severance Funds.
•    They are debited for: In the payment, credit to the account, or return of goods and services on credit such as financial expenses, legal expenses, books, subscriptions, newspapers and magazines, commissions, fees, technical services, maintenance services, leases, public services, representation, and public relations expenses, in discounts for withholdings at the source and withheld sales tax, withheld industry and commerce tax, payroll withholdings and contributions such as contributions to the Compensation Fund, Pension, and Severance Fund.

Conclusion

•    The accounts are the set of records where all the transactions that occur in an economic entity are detailed chronologically.
•    According to the group they belong to, the accounts can present a balance according to their own classification, namely:
o    That the Assets and Expenses are of a debit nature and are increased with a debit or credit in the DEBIT and decrease with a credit or credit in the CREDIT.
o    That the Liabilities and Equity are of a credit nature and are increased with a credit or payment in the DEBT, and decrease with a charge or debit in the DEBT.
o    That the Income accounts are of a credit nature and are increased with a credit or credit in the CREDIT and decrease with a charge or debit in the DEBIT.
o    That the Expenses and Costs accounts are of a debit nature and are increased with a charge or debit in the DEBIT and decrease with a credit or credit in the CREDIT.
•    According to their nature, they may present debit or credit balances.
o    Assets are a debtor in nature
o    Liabilities are of a credit nature
o    Income is of a credit nature
o    Expenses and Costs are debtor nature.
•    That according to the Financial Statement in which they are presented, these can be:
o    Assets, Liabilities, and Equity (Statement of Financial Position)
o    Income, Expenses, and Costs (Income Statement)

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