Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

Expense Debits and Credits.—With regard to their debit and credit, expense accounts follow this rule:

Expense (under appropriate titles)
Debit:	Credit:
(1) For the cost.	(a) For all deductions from the cost,
	shown contra.

Expense accounts normally have entries only on the debit side. Their credits are for purposes similar to the debits to income accounts as stated just above.

Examples of temporary proprietorship items can be found in [Chapters V], [VI], and [VII], where the profit and loss summary is treated.

Vested Proprietorship Debits and Credits.—Two accounts should be kept on the ledger with the proprietor, a capital and a personal account, i.e., “John Doe, Capital” and “John Doe, Personal.” The capital account records the original investment or the amount of capital now in the business as shown by the last financial statement. The personal account shows all direct changes made in the capital during the fiscal period either through withdrawal or the additional investment of funds or properties. The capital account, therefore, shows no change until the close of the fiscal period, when the increase or decrease in net worth is transferred to it.

An exception to this is sometimes made when there is evident intention to withdraw during the period some of the invested capital, in which case such withdrawal is shown in the capital account as a debit or subtraction item. Also, if there is evident intention to increase the investment during the fiscal period, record of it is sometimes made in the capital account. Practice in this regard is not uniform.

The ordinary transactions with the proprietor, such as more or less regular withdrawals of cash or goods and other similar transactions, are recorded in his personal account. This is his current account as distinguished from his more permanent capital account. Both of these accounts may be termed vested proprietorship accounts. Their debit and credit schedule appears as follows:

(Name of Account)
Debit:	Credit:
(1) For amounts or values withdrawn.	(a) For amounts or values invested.

The capital account usually shows only one item throughout the period until its close; the personal account shows both debits and credits, made according to the above schedule. The personal account ordinarily shows transactions of the following kind: on the debit side, withdrawals in funds or goods, the payment or assumption by the business of the personal debts of the proprietor, and his retention of any funds or properties belonging to the business, such as collections from customers; on the credit side, the investment in the business of any funds or properties, the retention by the business of any funds or properties belonging to the proprietor, as where the business collects and retains a debt due him personally, and the payment or assumption by him personally of any debts of the business.

Further Consideration of Expense Items.—In explaining the debits to fixed asset accounts it was pointed out that all costs necessary to place the asset in position for use by the business constituted a part of the value of the asset and should be recorded in the asset account. Similarly, it was explained that in the Merchandise account there was included as a part of the value of the merchandise all the costs incident to putting the merchandise in position for sale by the business. Costs of this kind are classed as incoming costs and are almost without exception treated as additions to the value of the asset. The costs incurred from this point on, in the course of business operations, are classed as expenses or proprietorship decreases.