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Why are Incomes Credited?

>> August 4, 2013

If you ask the question from me, “Why are Incomes Credited?” I will reply the following words.

All the incomes of business will increase the capital of business. So, when we will credit the incomes, it means we are increasing business’s capital. Whether you are operating individual business or company type business, incomes will increase your own capital or shareholder’s equity capital. So, it is necessary to credit all the incomes and debit cash or bank or what asset, we will receive in your  journal entry.

 We can also explain it in the business’s balance sheet. You know that net income is transferred to the capital account in the balance sheet. What is the net income? Net income is also difference between total incomes and total expenses. Suppose, we do not make income statements, then we will add the total incomes in capital in the liabilities side of balance sheet and deduct the total expenses from capital in same balance sheet. You also know that capital account show credit balance. When we credit the incomes, it means, we are increasing the balance of capital account. Second side, cash or bank balance will also increase with incomes and decrease with expenses. In the end, our balance sheet will match because it works on the accounting equation.

 For example

 Mr. James Hill got $ 1000 income from rent and $ 2000 from interest. We will pass the journal entry by debiting bank with $ 3000 and credit rent income account with $ 1000 and credit $ 2000. In this entry, cash book’s balance will increase because bank account is debit in the entry and this bank account will debit in cash book. Both incomes account will be open and rent income will go to the credit side of rent income account and interest income will go to interest income account. Now, if we will transfer these balances directly to the balance sheet, we will add all these incomes in capital and cash book balance will show in asset side. So, both side will match. If we will not receive the cash from income, then only asset side will affected because income receivable account will debit instead of bank account debit. So, we show another asset in the balance sheet with the name of rent receivable and interest receivable account.

Related : Debit and Credit Basics 

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