Question 1

Why is revenue credited instead of debited in accounting?

Accepted Answer

Revenue is credited because it increases owner's equity. When a business earns income through sales or services, crediting the revenue account reflects this increase. For example, Sarah's bakery credits Sales Revenue for five thousand dollars in cake sales, while debiting Cash to show the money received. This follows the double entry accounting system where revenues boost net income.

Question 2

What is the normal balance for expense accounts and why?

Accepted Answer

Expense accounts have a normal debit balance because expenses decrease owner's equity. When Sarah pays eight hundred dollars for electricity, the Utility Expense account is debited and Cash is credited. This debit entry reflects the cost of operating the bakery and the reduction in resources. Debiting expenses ensures accurate tracking of costs incurred to generate revenue.

Question 3

How do debits and credits affect the accounting equation in revenue transactions?

Accepted Answer

In revenue transactions, crediting the revenue account increases equity while debiting an asset like Cash maintains the accounting equation balance. When Sarah earns five thousand dollars, crediting Sales Revenue increases her equity, and debiting Cash shows the asset received. This dual effect ensures the accounting equation remains balanced, with assets equaling liabilities plus equity.

Question 4

What accounts are affected when a business records an expense?

Accepted Answer

When recording an expense, two accounts are affected: the specific expense account is debited, and the Cash account is credited. For instance, Sarah debits Utility Expense for eight hundred dollars and credits Cash. This transaction shows that resources have been used to operate the business. Both accounts change to maintain the double-entry system balance.

Question 5

How do revenues and expenses impact owner's equity differently?

Accepted Answer

Revenues increase owner's equity because they represent income earned by the business, while expenses decrease owner's equity because they represent costs incurred. Sarah's five thousand dollars in revenue raises her equity, but her eight hundred dollar utility expense lowers it. Understanding these opposite effects helps maintain accurate financial records and calculate net income correctly.

Question 6

Why must every revenue and expense transaction involve at least two accounts?

Accepted Answer

Every transaction involves at least two accounts because the double-entry system requires recording both the source and use of funds. When Sarah records revenue, she credits Sales Revenue and debits Cash to show income received. When she records an expense, she debits the expense account and credits Cash to show resources used. This dual recording ensures complete and accurate financial documentation.

Question 7

What does it mean when a revenue account has a credit balance?

Accepted Answer

A credit balance in a revenue account indicates accumulated income earned by the business. Revenues have a normal credit balance because credits increase these accounts, reflecting sales, services, or interest income. Sarah's Sales Revenue account shows a credit balance of five thousand dollars from her cake sales. This credit balance directly increases her net income and overall owner's equity.

Debit and Credit Effects for Revenues and Expenses

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