Why Revenues are Credited
Revenues cause owner’s equity to increase. Since the normal balance for owner’s equity is a credit balance, revenues must be recorded as a credit. At the end of the accounting year, the credit balances in the revenue accounts will be closed and transferred to the owner’s capital account, thereby increasing owner’s equity. (At a corporation, the credit balances in the revenue accounts will be closed and transferred to Retained Earnings, which is a stockholders’ equity account.)
It may be helpful to think of the accounting equation, Assets = Liabilities + Owner’s Equity, to understand why an asset (shown on the left side of the accounting equation) will normally have its account balance on the left side or debit side. Liabilities and owner’s equity accounts (shown on the right side of the accounting equation) will normally have their account balances on the right side or credit side.
Example of Why Revenues are Credited
To illustrate why revenues are credited, let’s assume that a company receives $900 at the time that it provides a service and therefore is earning the $900. The increase in the company’s assets will be recorded with a debit of $900 to Cash. Since every entry must have debits equal to credits, a credit of $900 will be recorded in the account Service Revenues. The credit entry in Service Revenues also means that owner’s equity will be increasing.
If the company earns an additional $500 of revenue but allows the customer to pay in 30 days, the company will increase its asset account Accounts Receivable with a debit of $500. It must also record a credit of $500 in Service Revenues because the revenue was earned. The credit entry in Service Revenues also means that the owner’s equity will be increasing.
