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December 31, 2008

Why does a company’s profit appear as a credit on its balance sheet?

The accounting equation and the double entry system provide an explanation why a company’s profit appears as a credit on its balance sheet.

Asset accounts usually have debit balances while liabilities and owner’s or stockholders’ equity usually have credit balances. When a company provides services for cash, its asset Cash is increased by a debit and its owner’s equity is increased by a credit. The credit is initially recorded in a revenue account, but revenue accounts are temporary accounts that cause owner’s equity to increase.

If the owner withdraws some cash for personal use, the asset Cash will decrease through a credit and the owner’s equity will decrease through the debit part of the accounting entry. The debit might initially be recorded in the sole proprietor’s Drawing account but this account is also a temporary account that will cause the owner’s equity to decrease.

Generally speaking, the credit balance reported in the owner’s or stockholders’ equity section of the balance sheet reflects the owners’ investments in the company plus the profits earned minus the amounts distributed to the owners since the time that the company began.

Learn more about the Accounting Equation.

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Comments

9 Responses to “Why does a company’s profit appear as a credit on its balance sheet?”

  1. srinivas on January 2nd, 2009 5:31 pm

    What is IFRS. Give some highlights of IFRS

  2. mamdouh on January 4th, 2009 12:27 pm

    Hello

    I want any material for Budget
    thank you

  3. hello on January 7th, 2009 7:04 am

    i want interview question related to accounts with answer

  4. jamil on January 9th, 2009 5:30 am

    Please provide me detail of following queries

    1- What is the Deffered cost
    2- What is the Deffered Taxes
    3- What is the Deffered Liabilities;

    Thanks & Regards
    Jamil Ahmed

  5. shaan on February 13th, 2009 2:54 am

    i want interview question related to accounts with answer

  6. wilmot on February 13th, 2009 5:34 am

    i want interview questions related to accounts with answer

  7. mIKE on April 26th, 2009 1:35 pm

    Why is the owner’s drawing account a temporary account? are there adjustments made to this account at the end of the year?

  8. S.Jawed on May 17th, 2009 1:05 am

    i want interview questions related to accounts with answers

  9. Masq on May 31st, 2009 11:03 pm

    I want to know Depreciation in accordance with IFRS.

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