Expenses and its Effects in the Capital (Proprietorship)

In carrying and managing the business operations, expenses are necessary in order to make profit.

Remember that net income or loss is a component of capital or equity account.

Implicitly, incurrence of expenses decreases a capital account because in order to compute for the net income or loss, the expenses are deducted from the revenue.  However, such deduction of expenses from revenues is not shown in the capital or equity section of the statement of financial position but is shown in the income statement, hence, the capital account is not used to debit expenses.

So, when expenses are incurred, the capital account is not the direct account to be used or to be debited but the appropriate expense account itself.  Various account title for expenses must be created for different types of expenses. Remember to assign one account title for a group of similar values.  The proper expense account must be debited whenever an expense is recorded.

Examples of different types of expenses are the following:

• Supplies expense
• Utilities expense
• Insurance expense
• Rent expense
• Delivery expense
• Transportation expense
• Advertising expense
• Repairs and Maintenance expense
• Salaries expense
• Wages expense