When Are Expenses Credited

When Expenses increase, we debit these and when these decrease, we credit these according to the Rules of Debit And Credit. Expenses have normal or favorable debit balance which is closed to Income Summary Account at the end of the accounting period as these are Temporary Accounts. Credit balance in expense account  shows unfavorable or negative balance which is due to certain we discussed here. In these certain circumstances we credited expenses accounts instead of debited.

Below is the list of those reasons due to which expenses are credited:

1. Post Closing Entries

At the end of the accounting period, all the expenses are closed to income summary account. we pass the following negative journal entry for all negative expenses accounts which are now closing:

                    Income Summary Account a/c   XXX

                                                                             Expenses Account a/c   XXX

                                             (Expenses Closed To Income Summary Account)

2. When Expenses Are Decreasing

As we know that as per Rules of Debit And Credit, when Expenses Decrease, we credit these accounts. There are certain circumstances in which we credit expenses accounts. These are given below:

(i) Reversing Entries Related To Accrued Expenses or Prepaid Expenses

In case of Accrued Expenses or Expenses Payable, which are recorded on the Accrual Basis of Accounting, expenses are credited as the cash is actually paid for such expenses. When these are incurred we pass the following entry:

                                                 Expenses a/c   XXX

                                                                     Accrued Expenses a/c   XXX

                                                      (Expenses Accrued for the period)

At the end of the period, when we actually paid our expenses, then we debit accrued expenses which is a Current Liability and credit expenses account to record reversing entry as shown below:

                                             Accrued Expenses a/c   XXX

                                                                                Expenses a/c   XXX

                                   (Reverse The Entry For The Expenses Accrued for the Month)

(ii) In case of Prepaid Expenses which are initially recorded as an Asset. At the end of the accounting period, when we actually receives the benefits, then credit Prepaid expenses and transfer the amount to relevant expense account against which we received the benefit as shown below from the entry:

                                        Prepaid Expenses a/c   XXX

                                                                          Expenses a/c   XXX

                                                            (Expenses Paid In Advance )

                                                    Expenses a/c   XXX

                                                                        Prepaid Expenses a/c   XXX

                                            (Portion of Benefits Received Against the Prepaid Expenses)

3. In Case of Reclass Entry

When we make a mistake or when there is an error, then we need to classify the amount from incorrect account to correct account. For Example, if we purchased goods from Mr. A for Rs. 5000 wrongly entered in Sales Book, then we pass the reclass the entry as shown below:

Mistakenly Recorded Entry:

                                                     Purchases a/c   XXX

                                                                             Mr. A   XXX

Reclass Entry

                                                                 Mr. A   XXX

                                                                            Sales a/c   XXX

                                                                            Purchases a/c   XXX

Here Purchases is a direct expense account which is credited in order to classify the correct account (sales account here).