1. Expense is the use of resources to generate revenue
2. Expense is recognized when related revenue is recognized
--> this is called "matching principle"
* Debits and credits
1. Expense accounts have normal balances on the debit side
2. Increases in expense accounts are recorded on the debit side
3. Decrease in expense accounts are recorded on the credit side
Examples of expense accounts
Cost of goods sold
Selling, general and administrative expenses
Salaries expense
Advertising expense
Rent expense
Travel expense
Communication expense
Insurance expense
Supplies expense
Utilities expense
Depreciation expense
Other expenses and losses
Interest expense
Income tax expense
Practice Questions
1. On November 1, 2010
Entity A purchased 500 units of merchandise at the price of $10 per unit
and paid full amount in cash
2. On November 12, 2010
Entity A sold 200 units of merchandise at the selling price of $14 per unit
and received full amount in cash
3. Prepare journal entries at the following dates
(1) November 1, 2010
(2) November 12, 2010
4. Journal entry at November 1, 2010
debit
credit
Merchandise
5,000
Cash
5,000
5. Journal entry at November 12, 2010, to record revenue
debit
credit
Cash
2,800
Sales revenue
2,800
6. Journal entry at November 12, 2010, to record expense
debit
credit
Cost of goods sold
2,000
Merchandise
2,000
7. Sales revenue = $2,800
Cost of goods sold = $2,000
Gross profit = Sales - Cost of goods sold = $2,800 - $2,000 = $800
8. At December 31, 2010
Balance of merchandise = 300 units x $10 = $3,000
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