Now we are going to look at how to debit and credit income statement accounts. Remember that income statement accounts are revenue, cost of merchandise and expenses.
- Revenue is the money generated from sales of goods or services.
- Cost of merchandise is the goods we purchase to resell to our customers.
- Bromley's Formal Wear, a merchandising company, uses these account types when it buys dresses, shirts, bridal gowns, etc from its suppliers to be sold to its customers.
- Expenses are money spent to obtain that revenue.
- Examples of expenses are salary, insurance rent, utilities, etc.
- There are two kinds of income statements:
- One for a service business and the other for a merchandising business.
- The service business income statement has only the revenue and expenses accounts from the general ledger.
- The merchandising income statement has a special section designed to show the cost of goods sold.
If you look at the two boxes to the right, you will see the service business one, Bromley's Tuxedo Rentals, and in the next column, the merchandising business income statement for Bromley's Formal Wear. Both companies have a net loss, since an open house's revenue has not be calculated in the total revenue.
|Title of Account|
|Left or Debit side||Right or Credit side|
- An amount recorded on the left or debit side of an account is called a "Debit" or a debit entry.
- An amount recorded on the right or credit side is called a "Credit" or a credit entry.
- Accountants use the words debit and credit as verbs.
- The act of recording an entry on the left-hand side of the account is called "debiting".
- The act of recording an entry on the right side of an account is called "crediting".
- If there are both debit and credit entries to an account, the balance in the account represents the difference between the two amounts.
- If the debit side has a greater number, then the account has a debit balance.
- If the credits are greater than the debits, then the account has a credit balance.
- All revenue accounts normally have credit balances.
- Expenses and Purchases have debit balances.
If have not already done so, click on the link above called "Principles of Debits and Credits" and print it out. You will find this document invaluable when completing the tutorials and exercises.
When finished with the tutorial, click on the link for Debit and Credit Income Statement Accounts Exercise.