A company’s payment of each month’s rent is recorded with a credit to Cash and a debit to Rent Expense. The credit to Cash causes a reduction in the company’s assets. The debit to Rent Expense causes owner’s equity (or stockholders’ equity) to decrease.

The reason the debit causes owner’s equity to decrease is that expenses are temporary accounts that will be closed to the owner’s capital account (or to a corporation’s retained earnings account within stockholders’ equity).

More examples and explanations of the effect of revenues, expenses, and other transactions can be found at Accounting Equation.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

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