Income and expenses affect the profits made by an entity. Which of the following statements best describes how this fact is consistent with the accounting equation and the debit and credit rule?
A) Income increases equity and so should be a debit and expenses decrease equity and so should be a credit.
B) Income increases equity and so should be a credit and expenses decrease equity and so should be a debit.
C) Income decreases equity and so should be a debit and expenses increase equity and so should be a credit.
D) Income and expenses both affect equity and so both should be a credit if they are increasing.

Question

Quizplus · Accepted Answer

The accounting equation states that Assets = Liabilities + Equity. Since income increases equity, it should be credited to the equity account. On the other hand, expenses decrease equity, so they should be debited to the equity account. Furthermore, the debit and credit rule states that debits must equal credits, so if income is credited, its corresponding account (usually revenue) must be debited, while if expenses are debited, their corresponding account (usually expenses) must be credited. Therefore, choice B is the correct answer.

Income and Expenses Affect the Profits Made by an Entity