Correct Answer: In double-entry accounting, when money leaves your company to pay bills, it should be recorded in the credits column, not the debits column.
Here’s why:
- Double-entry accounting means every transaction is recorded with both a debit and a credit.
- For a payment to settle a bill (like paying for office supplies or utilities):
- Cash (or Bank Account) is an asset account. When you pay a bill, the cash leaving the company reduces the company’s assets, so the cash account should be credited (decrease).
- Expense accounts, such as “Office Supplies Expense” or “Utility Expense,” represent costs for the company. When paying bills, expenses increase, so these accounts should be debited (increase).
Example:
- Transaction: Paying a $500 utility bill.
- Debit Utility Expense (Expense account): $500 (This increases the expense).
- Credit Cash (Asset account): $500 (This decreases cash).
Why is this the correct method?
- The debited account is used to increase expenses (like utility bills) because expenses increase on the debit side.
- The credited account is used to decrease assets (such as cash) because the company is paying out money, which reduces its cash balance.
In Summary:
- When you pay bills, expenses increase (debit), and cash decreases (credit). Therefore, in the accounting equation, a payment will decrease assets and increase expenses. This is why it is recorded in the credits column for cash and the debits column for expenses.
