Q. Recording changes in revenues and expenses?
Examine that Notes Payable, liabilities and increase with an entry on the right (credit) side of the account. Recording changes in revenues and expenses we recorded the expenses and revenues directly in the Retained Earnings account. But this isn't done in practice because of the volume of revenue and expense transactions. in its place businesses treat the expense accounts as if they were sub classifications of the debit side of the Retained Earnings account and the revenue accounts as if they were sub classifications of the credit side. Ever since firms need the amounts of revenues and expenses to prepare the income statement they keep a separate account for every type of revenue and expense. The recording rules for expenses and revenues are:
- Record enhance in revenues on the right (credit) side of the T-account and decreases on the left (debit) side. The reasoning following this rule is that revenues increase retained earnings and increases in retained earnings are recorded on the right side.
- Record enhance in expenses on the left (debit) side of the T-account and decreases on the right (credit) side. The reasoning following this rule is that expenses decrease retained earnings and decreases in retained earnings are recorded on the left side.