Why are revenues credited?

The reason why revenues are credited is that they represent an increase in the shareholders' equity of a business, and shareholders' equity has a natural credit balance. Thus, an increase in equity can only be caused by transactions that are credited. The foundation of this reasoning is the accounting equation, which is:

Assets = Liabilities + Shareholders' equity

The accounting equation appears in the structure of the balance sheet, where assets (with natural debit balances) offset liabilities and shareholders' equity (with natural credit balances). When a sale occurs, the revenue (in the absence of any offsetting expenses) automatically increases profits - and profits increase shareholders' equity.

For example, a company sells $5,000 of consulting services to a customer on credit. One side of the entry is a debit to accounts receivable, which increases the asset side of the balance sheet. The other side of the entry is a credit to revenue, which increases the shareholders' equity side of the balance sheet. Thus, both sides of the balance sheet remain in balance.

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