When processing an invoice, understanding which account to debit is crucial for maintaining accurate financial records. This action, known as journal entry, involves transferring funds from one account to another, typically from an asset or expense account to an equity account. The account debited is the one that loses funds, or is reduced, during the transaction.
In the context of invoices, the most common accounts debited are expenses and cost of goods sold (COGS). Let's delve into these accounts and understand when they are debited while processing an invoice.
Expenses
Expenses are costs incurred to generate revenue. When processing an invoice, expenses are debited when the cost is directly related to the sale, such as sales commissions, advertising, or salaries.
For instance, if your company spends $500 on advertising to generate sales, and you've just processed an invoice for $10,000, you would debit the advertising expense account for $500.
Sales Commissions
Sales commissions are expenses incurred to generate sales. When processing an invoice, the sales commission expense is debited for the amount earned by the salesperson.
For example, if your salesperson earns a 10% commission on a $10,000 sale, you would debit the sales commission expense account for $1,000.
Advertising
Advertising is an expense incurred to promote your products or services. When processing an invoice, the advertising expense is debited for the amount spent on advertising.
For instance, if you've spent $500 on advertising and have just processed a $10,000 invoice, you would debit the advertising expense account for $500.
Cost of Goods Sold (COGS)
COGS is the direct cost of producing the goods sold. When processing an invoice, COGS is debited for the cost of the goods included in the sale.
For example, if your company sells widgets for $10 each, and the cost to produce each widget is $6, when processing an invoice for 100 widgets, you would debit COGS for $600 (100 widgets * $6 per widget).
Direct Materials
Direct materials are the raw materials used to produce the goods. When processing an invoice, the direct materials COGS sub-account is debited for the cost of the materials used in the goods sold.
For instance, if your company uses $300 worth of raw materials to produce goods that are then sold for $1,000, you would debit direct materials COGS for $300.
Direct Labor
Direct labor is the wages paid to employees who work directly on producing the goods. When processing an invoice, the direct labor COGS sub-account is debited for the wages paid to these employees.
For example, if your company pays $400 in wages to employees who work directly on producing goods that are then sold for $1,200, you would debit direct labor COGS for $400.
Understanding which account to debit when processing an invoice helps maintain accurate financial records and provides valuable insights into your company's expenses and profitability. Regularly reviewing and updating your journal entries ensures your financial statements reflect a true and fair view of your company's financial position.