What is the normal balance of revenue?

The normal balance of revenue is a credit. This means that increases in revenue are recorded as credits in the accounting system.

Understanding Normal Balances in Accounting

In the world of accounting, every account has a "normal balance," which refers to the side (debit or credit) on which an increase in that account is recorded. It is the balance that an account is expected to have. Understanding normal balances is fundamental to accurate double-entry bookkeeping, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.

Why Revenue Has a Credit Balance

Revenue represents the income earned by a business from its primary operations, such as selling goods or providing services. The reason revenue has a normal credit balance stems from its relationship with owner's equity (or fund balance in non-profit entities).

• Impact on Equity: Revenue increases the owner's equity in a business. As equity grows, it is recorded with a credit.
• Accounting Equation Logic: In the accounting equation, assets increase with debits, while liabilities and equity increase with credits. Since revenue ultimately increases equity, it follows the same rule—an increase in revenue is recorded as a credit. Conversely, a decrease in revenue (which is less common) would be recorded as a debit.

Revenue's Role on Financial Statements

Revenue accounts are instrumental in preparing the Income Statement, also known as the Profit and Loss Statement. This financial statement reports a company's financial performance over a specific period by summarizing revenues, expenses, and net income (or loss). Revenues are presented at the top of the Income Statement, providing the starting point for calculating a business's profitability.

Practical Example of Revenue Recording

Consider a scenario where a consulting firm performs services for a client and immediately receives cash payment.

• Action: The firm earns $1,000 in service revenue.
• Impact:
  • Cash (an asset account) increases by $1,000. Assets increase with a debit.
  • Service Revenue (a revenue account) increases by $1,000. Revenue increases with a credit.
• Journal Entry:
  • Debit Cash: $1,000
  • Credit Service Revenue: $1,000

This entry correctly reflects the increase in both an asset and a revenue account, maintaining the balance of the accounting equation.

Overview of Account Categories and Their Normal Balances

To provide further context, here's a general overview of common account categories, their normal balances, and the financial statements on which they typically appear: