Income and its Effect in Capital (Proprietorship)

Most of the time, when income is mentioned in accounting, it refers to the gross revenue the company generates.

Income increases a capital account. But, note that not all increases in capital account is an income account. Initial capital and additional contribution likewise increases the capital or equity.

Income increase a capital when such income is recognized as having been earned. See realization principle.

Though income increases capital account, the capital account should not be directly used or be credited when recording an income.  It is the proper revenue account which must be credited to record an income. So, for every type of revenue, a distinct account title must be assigned.  For examples, see  revenue elements.

NORMAL BALANCES OF ACCOUNTING ELEMENTS

In accounting principle, accounting elements have this so-called normal balance.  A beginner to bookkeeping must bear in mind the following:

• The ASSETS and EXPENSES Accounting Elements have a DEBIT normal balance.

• The LIABILITIES, EQUITIES and REVENUES Accounts have a CREDIT normal balance.

In mathematics, numbers or integers with the same signs means addition or adding the numbers with the same sign or increases the sum, while, integers with the different signs means subtraction or deducting the numbers or decreases the sum.

In analogy, an account with a debit normal balance increases when a like-sign amount is added, so, when an asset or expense account is debited, the account increases (because an amount is added) and when an asset or expense account is credited the account decreases (because an amount is subtracted).

Likewise, an account with a credit normal balance increases when a like-sign amount is added, so, when a liability, equity or revenue account is credited, the account increases  (because an amount is added) and when a liability, equity or revenue account is debited the account decreases (because an amount is subtracted).

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Revenue Elements

Revenues are the gross earnings of the business as a result of selling goods and rendering services.

Examples of Revenue Elements

• Sales - refers to the revenue from sale of goods of a trade or merchandising business whether cash sales or sales on account.

• Service Income - refers to the earnings from rendering services by a servicing company whether cash and on account services.

• Professional Fees - refers to the earnings in rendering of services of professionals or professional servicing firms to their clients which could in cash or collectibles.

• Interest Income - refers to the earnings from the interest which derived from the promissory notes received by the organization whether in cash or collectible in the future.

• Rent Income - refers to the earnings from letting others use the properties or facilities of the entity.

• Gain on sale of other assets - refers to the earnings derived from selling the assets of the organization.  Gain on sale is when the proceeds of sale exceeds the book value of the asset being sold.  

Normal Balance : Credit

Revenue accounts have a normal credit balances. 

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