Equity and Revenue Accounts

accountantIn order to use the terms debit and credit as accountants do, we must apply the rules for assets, expenses and dividends to the opposite side of the coin…meaning apply it to the equity accounts and the revenue accounts, where they will work in reverse.  To record asset increases, you make left-hand, or debit entries; but to record increases in liabilities you make right-hand entries or credit entries.  This is perfectly logical if you think about it because on the balance sheet all the liabilities and equities are reported on the right hand side.  Finally, revenues are positive factors with respect to ownership accounts.  Meaning your sales revenue, your dividend revenue, your rent revenue, and your sales revenue all have the same affect of increasing your ownership equity; so revenue accounts,  also are increased by right hand entries AKA credits.

The sales revenue account is a little easier to interpret.  As in the case of expense accounts, there’s never an opening balance in a revenue account at the start of a period; after entries are made on the right-hand side to record the revenue of each month, the whole amount is canceled out by the left-hand closing entry.  To repeat, asset and equity accounts, balance sheet accounts generally have opening and closing balances because they are swept clean at the end of each period by closing entries.

The very basic rule that all accountants must follow is: At all times the sum of all amounts accumulated by left-hand entries must be kept equal to the sum of all amounts accumulated by right-hand entries.  That is the secret to any balance sheet…. the total of the asset side always equals the total of the liabilities and equity side.