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

NORMAL BALANCES OF ACCOUNTING ELEMENTS

In accounting principle, accounting elements have this so-called normal balance.  A beginner to bookkeeping must bear in mind the following:

• The ASSETS and EXPENSES Accounting Elements have a DEBIT normal balance.

• The LIABILITIES, EQUITIES and REVENUES Accounts have a CREDIT normal balance.

In mathematics, numbers or integers with the same signs means addition or adding the numbers with the same sign or increases the sum, while, integers with the different signs means subtraction or deducting the numbers or decreases the sum.

In analogy, an account with a debit normal balance increases when a like-sign amount is added, so, when an asset or expense account is debited, the account increases (because an amount is added) and when an asset or expense account is credited the account decreases (because an amount is subtracted).

Likewise, an account with a credit normal balance increases when a like-sign amount is added, so, when a liability, equity or revenue account is credited, the account increases  (because an amount is added) and when a liability, equity or revenue account is debited the account decreases (because an amount is subtracted).

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Expenses Elements

Expenses are the costs incurred or consumed in the process of producing revenues.

Examples of Expenses Elements

Direct Cost to produce revenue

• Cost of Sales – cost of Merchandising inventory sold. 
• Cost of Service - direct cost of service rendered
• Cost of Goods Manufactured and Sold – cost of sold manufactured goods.

Operating Expenses

1. Marketing and Selling Expenses - pertains to costs in doing marketing and selling activities of the entities

• Commissions 
• Advertising and Promotions 

2. General and Administrative Expenses - pertains to costs in operating and administering activities of the organization. 

• Salaries and Wages
• Travel, Transportation, Gas and Oil
• Taxes and Licenses
• Rent
• Insurance
• Supplies
• Utilities: Communications, Electricity and Water 
• Utility Services: Janitorial, Security Guards
• Depreciation

Other Expenses and Losses 

• Interest Expense
• Loss on disposal of equipment 
• Income tax expense

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