Refund of expenses

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

09 July 2016 Is a refund/reduction of expense in a subsequent year an income or to be credited to the relevant expense A/c

Querist : Anonymous

Querist : Anonymous (Querist)

12 July 2016 Kindly reply please.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

20 July 2025 Great question!

Refund or reduction of expense received in a subsequent year — how to treat it depends on the nature of the expense and the accounting principles you follow:

General Accounting Treatment:
If the expense was charged fully in the earlier year:
The refund or reduction should be credited to the same expense account in the current year (i.e., reduce the expense).
This is called "prior period adjustment" or simply a correction in the books.
Example: If you paid rent last year but got some refund this year, you credit the rent expense account this year.
If the amount is material and relates to a prior period:
You can disclose it as a prior period income in the profit & loss account separately (some companies prefer this for clarity).
If the refund relates to a capital expense:
Adjust against the asset’s cost (reduce asset value) rather than recognizing as income.
Tax Implications:
For Income Tax purposes, generally, refund of an expense reduces the deductible expense.
It is not treated as “income” unless it was a reversal of an expense previously claimed in a different manner.
In short:
Usually, credit the relevant expense account to adjust the books properly.
Only if the amount is large or exceptional, consider showing it as prior period income.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now