Cash, then, is neither an expense nor a revenue. It serves as a form of payment instead. Cash is used to make purchases, settle debts, and pay wages and salaries. Cash does not indicate a decrease in the value of an asset or an increase in the value of a liability, hence it is not an expense. Cash does not raise the value of a company’s assets, hence it is not considered revenue.
By debiting the expenditure account and crediting the cash account or accounts payable account, expenses are documented in accounting. For instance, if a business purchases $1,000 worth of supplies on credit, it would debit the $1,000 from the supplies expense account and credit the $1,000 from the accounts payable account. When the company pays the invoice, a $1,000 debit is made to the accounts payable account and a $1,000 credit is made to the cash account.
It is significant to remember that expenses shouldn’t necessarily be recorded when they are paid, only in the period in which they were spent. For instance, the expense should still be recorded in December even if a business receives a bill for services done in December but does not pay the charge until January.
In conclusion, the majority of firms favor accrual basis accounting since it gives a more realistic view of a company’s financial situation. Cash is a form of payment, neither an expense or a source of income. Debiting the expense account and either crediting the cash or accounts payable account represent the recording of expenses. While it’s not always necessary, it’s crucial to report expenses in the time period in which they were incurred.