State BPA Fundamental Accounting Practice Exam

What type of account is typically credited when a company earns revenue?

1. Asset Account

2. Liability Account

3. Revenue Account

4. Expense Account

The correct answer is: Revenue Account

When a company earns revenue, it typically credits a revenue account. This is because revenue accounts represent the income generated from normal business operations, such as sales of goods or services. When revenue is earned, it increases the equity of the business, which is reflected by crediting the revenue account. In accounting, revenue is recognized when it is earned, regardless of when the cash is received. Crediting the revenue account increases the amount of revenue reported on the income statement, which ultimately affects the net income reported on the company's financial statements. This practice aligns with the accrual basis of accounting, emphasizing the matching of revenue with expenses incurred to generate that revenue. Understanding this concept is crucial for grasping how financial transactions impact the fundamental accounting equation: Assets = Liabilities + Equity. Revenue affects equity by increasing it, thereby supporting the overall financial health of the business.