Prepaid expenses are items paid for in advance of their use. They are considered assets until used. Some examples can include insurance and rent. Insurance, for example, is usually purchased for more than one month at a time . The company does not use all six months of the insurance at once, it uses it one month at a time.

Printing Plus did not pay immediately for the supplies and asked to be billed for the supplies, payable at a later date. This creates a liability for the company, Accounts Payable. This liability increases Accounts Payable; thus, Accounts Payable increases on the credit side. Printing Plus has not yet provided the service, meaning it cannot recognize the revenue as earned. The company has a liability to the customer until it provides the service.

Recording Transactions accounts increase with debit entries. Apr. 25You stop by your uncle’s gas station to refill both gas cans for your company, Watson’s Landscaping. Your uncle adds the total of $28 to your account.Apr. 26You record another week’s revenue for the lawns mowed over the past week. You received cash equal to 75% of your revenue.Apr. 27You pay your local newspaper $35 to run an advertisement in this week’s paper.Apr.

  • Eventually that debt must be repaid by performing the service, fulfilling the subscription, or providing an asset such as merchandise or cash.
  • This may be because such companies issue shares to the general public.
  • We will increase the expense account Salaries Expense and decrease the asset account Cash.
  • The accounting equation is an accounting fundamental that bookkeepers need to master to be proficient.
  • Cash is decreasing because it was used to pay for the outstanding liability created on January 5.

Equity typically refers to shareholders’ equity, which represents the residual value to shareholders after debts and liabilities have been settled. Locate total shareholder’s equity and add the number to total liabilities. Think of retained earnings as savings, since it represents the total profits that have been saved and put aside (or „retained”) for future use. Debt is a liability, whether it is a long-term loan or a bill that is due to be paid. The major and often largest value asset of most companies be that company’s machinery, buildings, and property. These are fixed assets that are usually held for many years.

Double Entry & T Accounts

An in sales due to advertising will also increase net earnings, and the ratio between flat costs and earnings will improve. Assets in accounting are resources that a company owns and uses to generate income and future economic benefits. Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe.

How expense affects owner’s equity?

Owner's equity decreases if you have expenses and losses. If your liabilities become greater than your assets, you will have a negative owner's equity. You can increase negative or low equity by securing more investments in your business or increasing profits.

This is posted to the Cash T-account on the debit side. You will notice that the transactions from January 3, January 9, January 12, and January 14 are listed already in this T-account. The next transaction figure of $2,800 is added directly below the January 9 record on the debit side. Service Revenue has a credit balance of $2,800. This too has a balance already from January 10. The new entry is recorded under the Jan 10 record, posted to the Service Revenue T-account on the credit side.


Explore direct expenses examples and indirect expenses examples. Balance sheet is the final written document of a company containing the details of all the assets and liabilities of an organization. It helps in calculating and analyzing different ratios which then help in making effective decisions by the investors or by the management of a company.

  • The record is placed on the debit side of the Accounts Receivable T-account underneath the January 10 record.
  • Cash increases with a $1,000,000 debit and equity increases with a $1,000,000 credit.
  • The business currently has $1,500 worth of assets and $1,500 worth of equity.
  • Just like common stock, the account increases with a credit and decreases with a debit.
  • Liabilities are obligations to pay an amount owed to a lender based on a past transaction.
  • Paying taxes, fees, permits, and salaries are liabilities once they become due but aren’t yet paid.

activities are a large part of any business, and the flow of cash in and out of the business is reported on the statement of cash flows. Note that cryptocurrencies are not considered cash. For accounting purposes, any form of cryptocurrency is considered an asset in the same way as a Renaissance painting. Revenue is the “top line” amount corresponding to the total benefits generated from all business activity. Income is the “bottom line” amount that results after deducting expenses from revenue. In some countries, revenue is also referred to as “turnover.” As you will see, revenue is summarized first in the company’s income statement. Let’s add this transaction to the equation.