Expense account is nominal account which is made for recording the expenses. There are lots of expenses account are made in business like salaries expenses account, rent expenses account, electricity expenses account, Internet expenses account and other small expenses account. If there is any new expense in the business, we can open its expense account by writing name of expense before expense account.
This account is prepared T form. Similar expenses will be debited in same expense account. For example, we pay rent at the end of each month. So, we will debited the amount of rent in rent expenses account. Same expense will record in the payment side of cash book. In the end of year whole expense account’s balance will transfer to profit and loss account. With this, expense account will close and will not go its balance to balance sheet.
Profit and loss account is made for comparison of revenue and expenses. When all expenses are debited in profit and loss account. We can compare it with total revenue. Result of this matching may be net profit or net loss which will transfer to balance sheet’s capital account.
Importance of Expenses Accounts for Income Tax
As per Income Tax Law 1961, all expenses are not accepted. There is accepted expenses accounts whose list is given in taxable income of business and profession. In self assessment of income tax, we will add only accepted expenses accounts in profit and loss account and then it will be matched with accepted revenue. Difference will be taxable income for income tax purpose.
Revenue Expenses Account Vs Capital Expenses
Revenue expenses are those whose benefit, we get within one year. So, all the revenue expenses account will written off by transferring to profit and loss account. We have to take benefits of capital expenses in many years. So, we transfer all capital expenditure accounts to balance sheet. Electricity expenses account is revenue expenses account and furniture expenses account is capital expenses account. Electricity expenses account’s total debit balance is Rs. 50,000, it will written off by transferring expense side of profit and loss account. On the other side, we have furniture expenses debit balance of Rs. 1,50,000, it will go to fixed asset side of balance sheet. Same balance will be live by showing opening balance of furniture account in next financial year. Every year, we will deduct depreciation. Same depreciation account will written off by transferring to profit and loss account.