What is an Income/Expense Account?

The words "Income" and "Expense" are beguilingly simple; everyone knows what they mean. Don't let this fool you: they have a special meaning when applied to double-entry accounting.

To properly record income and expenses in a double entry system, two special accounts must be created: one of type "Income" and one of type "Expense". Income such salary, wages, bank interest and stock dividends are then recorded as transfers from an income account to a bank (or generally, asset) account. Similarly, expenses are recorded as transfers from a credit card account (or generally, a liability account).

Why are accounts of type "Income" and "Expense" considered special? The answer lies in the nature of double-entry. With a double-entry transaction, one account is always credited, and another account is always debited. When salary is deposited in a bank account, the bank account is credited, and the income account is debited. In order to make income appear positive (as it is), and expenses look negative, the meaning of "debit" and "credit" is reversed for income and expense accounts. This makes them special.

Another way in which income and expense accounts are special is that their account totals do not appear on a balance sheet. A balance sheet shows "Net Worth": the sum of all assets minus all liabilities. Since income and expenses are neither assets nor liabilities, they do not appear on the balance sheet. There is a different kind of report, a "Profit and Loss" (P&L) report, that shows income and expenses. The total profit (or loss) is the total income minus total expenses. Since assets and liabilities are neither income or expenses, they do not appear on a P&L statement.

Even though the accounts may be "special", you do not need to do anything "special" to use income and expense accounts. Everything is handled automatically, as long as you remember to transfer income and expenses between income/expense accounts and ordinary bank/asset/credit-card/liability accounts.

Using Income/Expense Accounts

To use an income/expense account, simply create one from the "New Account" dialogue window, and then be sure to transfer income/expenses to it as you record paychecks, interest, etc.

If you have a complex account arrangement, you may want to create multiple income/expense accounts. One can be used to record salary, and only salary, another to record only bank interest, and a third only to record stock dividends. This partitioning is particularly useful when tax-time rolls around.


Users of Quicken (TM) products should realize that what Quicken calls "Categories" are really just Income/Expense accounts. Thus, if you are used to specifying a category in Quicken, just create an income/expense account of the same name in X-Accountant, and use that.