Revenues are
a. Impacted by debits and credits in the same way that expenses are impacted by debits and credits.
b. A subdivision of equity, providing information about why equity is increased.
c. Reported on the statement of financial position as a current item.
d. All of the choices are correct regarding revenues.
The correct answer and explanation is :
The correct answer is b. A subdivision of equity, providing information about why equity is increased.
Explanation:
Revenues play a significant role in financial accounting and impact the overall financial position of a company. Here’s an explanation for each option:
- Option A: Impacted by debits and credits in the same way that expenses are impacted by debits and credits.
- This option is incorrect because revenues and expenses are treated differently when it comes to debits and credits. Revenues increase equity, and therefore, are credited (not debited) to increase. Conversely, expenses reduce equity, and are debited (not credited) to decrease equity. So, while both are related to equity, the way debits and credits are applied differs.
- Option B: A subdivision of equity, providing information about why equity is increased.
- This is the correct answer. Revenues are part of equity and help explain why equity increases over time. When a company earns revenue, it contributes to the net income, which eventually increases equity (specifically retained earnings). Essentially, revenue is a key factor in increasing the owner’s equity, which is reflected in the equity section of the statement of financial position (balance sheet).
- Option C: Reported on the statement of financial position as a current item.
- This is incorrect. Revenues are not reported directly on the statement of financial position (balance sheet). They are reported on the income statement (also known as the profit and loss statement). The statement of financial position reports assets, liabilities, and equity, not revenues directly. The impact of revenues, however, can be seen in the increase in equity as part of retained earnings.
- Option D: All of the choices are correct regarding revenues.
- This is incorrect because options A and C are not correct, as explained above.
In summary, revenues are a part of equity, and they increase equity through the generation of income. The increase in equity from revenues is eventually reflected in the retained earnings section of the balance sheet, after accounting for expenses and taxes.