Why is the P&L profit entered on the credit side of the balance sheet?

The profit or net income belongs to the owner of a sole proprietorship or to the stockholders of a corporation. The owner’s or stockholders’ equity is reported on the credit side of the balance sheet. Recall that the balance sheet reflects the accounting equation, Assets = Liabilities + Owner’s Equity.

Let’s illustrate this with an example. Assume that you own a sole proprietorship and you provided a service to a customer. One of your business assets (cash or accounts receivable) increased and your liabilities were not involved. Therefore, your business liabilities will remain the same and your equity in the business will increase.

Accountants prepare an income statement or P&L to report the revenues and expenses, but the ultimate effect is that the business assets and owner’s equity will increase when there is a profit or net income.

Learn more about Accounting Equation.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.