Question

Please, I need a correct answer and clear explanation. Thank you,

The Retained Earnings account has a credit balance and credit entries are used to record increases in this account. Why do expense accounts, which are transferred to Retained Earnings when they are closed, have debit balances? Why are debit entries used to record increases in these accounts?

Answer 1

Retained Earnings ,is a balance sheet account ,that NORMALLY has a credit balance.It is part of the shareholders' equity --ie. Added to the paid-up capital balance ,on the liability-side of the balance sheet. It is the amount owed to the owners/shareholders of the business & hence held on the liability side. The ending balance is retained in teh business, without distributing as dividends .Hence the name RETAINED EARNINGS

Retained Earnings ,is formed by adding (crediting) the current year net income (after-tax) .to the already existing opening balance .

Preferred & common stock dividends are subtracted(debited) from the above & the ending balance is arrived.

All credits increase the balance in the account&

all debits decrease the balance in the account.

Expense accounts are nominal accounts & NORMALLY have debit balances.Expense account is debited & cash/account payable is credited.Hence they have debit balances.Any debit to this account , adds up to/increases the balance . So, when the value in the account is to be increased, the particular value is debited to the account.

At the end of the period, the total amount is transferred to the Income summary account, by debiting the same & crediting the expense account. So,the expense account is closed & becomes 0 .

The income summary account is credited with the incomes & then the balance in that account is transferred to the Retained earnings as current year net income.