Are Expenses Debits or Credits?
Expenses are debits. Every expense account increases with a debit, decreases with a credit, and carries a normal debit balance. The credit side of the entry says how the cost was settled: cash, accounts payable or accrued liabilities.
- Account category
- Expense
- Normal balance
- Debit (Dr)
- Increases with
- Increase (Dr)
- Decreases with
- Decrease (Cr)
- Financial statement
- Income statement
Classifying one account is easy. Ledger IQ classifies the whole trial balance.
Try it freeOperating expenses on a trial balance
| Acct # | Account | Debit | Credit |
|---|---|---|---|
| 1000 | Cash | 48,200.00 | |
| 1200 | Accounts receivable | 86,400.00 | |
| 1250 | Allowance for doubtful accounts | 4,200.00 | |
| 1500 | Equipment | 120,000.00 | |
| 1510 | Accumulated depreciation | 38,000.00 | |
| 2000 | Accounts payable | 31,500.00 | |
| 3000 | Common stock | 50,000.00 | |
| 3900 | Retained earnings | 92,000.00 | |
| 4000 | Sales revenue | 420,000.00 | |
| 5000 | Cost of goods sold | 240,000.00 | |
| 6000 | Operating expenses (the account this page is about) | 141,100.00 | |
| Total | 635,700.00 | 635,700.00 |
Example journal entries
| Account | Debit | Credit |
|---|---|---|
| Rent expense | 4,800.00 | |
| Cash | 4,800.00 |
| Account | Debit | Credit |
|---|---|---|
| Prepaid insurance | 12,000.00 | |
| Cash | 12,000.00 |
| Account | Debit | Credit |
|---|---|---|
| Repairs expense | 3,150.00 | |
| Accrued expenses | 3,150.00 |
Why it works that way, and the rule that survives
Expenses reduce equity. Equity increases with credits, so anything that reduces it is a debit.
The memory device most people learn is DEALER. Dividends, Expenses and Assets increase with a debit. Liabilities, Equity and Revenue increase with a credit. Six account types, two rules, and it covers nearly everything in a set of small business books.
Draws and dividends sit with expenses in that list because both reduce equity, even though a draw is not an expense and never reaches the income statement.
How it looks on a trial balance export
Expenses sit in the debit column, the same column as assets. The trial balance does not distinguish an asset from an expense by position, only by where the account sits in the chart of accounts.
On a signed balance column, expenses print as positives and revenue prints as a negative. A credit balance in an expense account means a refund or rebate larger than the costs recorded, a correction posted to the wrong account, or an amount being reversed out because it should have been capitalised.
The check worth running on every file is to subtotal by type. Expenses on the trial balance should foot to the expense total on the client's income statement. When they do not, an account has been typed into the wrong section of the chart of accounts, which is invisible on a trial balance and obvious on a profit and loss.
Expenses in the books that are not deductions
Penalties and fines, entertainment, political contributions, federal income tax paid by a C corporation, and certain life insurance premiums where the company is the beneficiary. Business meals carry their own limitation.
Each is a permanent difference belonging on Schedule M-1, which is why these costs need their own accounts rather than being buried in miscellaneous expense.
Mistakes that throw it off
Owner draws coded to an expense account. The money left the bank, so the bookkeeper called it an expense. It is a distribution and belongs in equity. Coded as an expense it understates income and never reaches the distribution line.
Capitalisable assets expensed. A 9,000 machine in repairs and maintenance deducts in full this year and never appears on Schedule L.
Everything in other deductions. Allowed, since the line takes a statement, but a return where most deductions sit in one line is harder to review and loses the named lines a reviewer expects to see populated.
Where it fits in the accounting equation
Tax return treatment
| Form | Line |
|---|---|
| Form 1120 | Page 1 lines 12 to 26, other deductions on line 26 |
| Form 1120S | Page 1 lines 7 to 20, other deductions on line 20 |
| Form 1065 | Page 1 lines 9 to 21, other deductions on line 21 |
Common questions
Are expenses debits or credits?
Debits. Every expense account increases with a debit, decreases with a credit, and carries a normal debit balance. The credit side of the entry says how the cost was settled: cash if paid, accounts payable if a bill was received, accrued liabilities if neither has happened yet.
What is the DEALER rule?
A memory device for which account types increase with which entry. Dividends, Expenses and Assets increase with a debit. Liabilities, Equity and Revenue increase with a credit. Six account types, two rules, and it covers nearly everything you meet in a set of small business books.
Why would an expense account have a credit balance?
Usually a refund or rebate larger than the costs recorded in the period, a correction posted to the wrong account, or an amount being reversed out because it should have been capitalised. A credit balance in an expense account is always worth opening up before the return is prepared.
Where do expenses go on the tax return?
On named page 1 lines, with the remainder summarised. Form 1120 uses lines 12 through 26, Form 1120S uses lines 7 through 20, and Form 1065 uses lines 9 through 21. Each form ends with an other deductions line that carries a supporting statement for everything without a named line.
What is the difference between cost of goods sold and an expense?
Cost of goods sold is the direct cost of producing what was sold: materials, direct labour and other production costs. It is reported on Form 1125-A and reduces gross profit before page 1 deductions begin. Recording a production cost in both cost of goods sold and page 1 expenses deducts it twice.
Which expenses in the books are not deductible?
Penalties and fines, entertainment, political contributions, federal income tax paid by a C corporation and certain life insurance premiums where the company is the beneficiary. Business meals carry their own limitation. Each is a permanent difference that belongs on Schedule M-1, which is why these costs need their own accounts rather than being buried in miscellaneous expense.
Last reviewed October 17, 2026.