Why Revenues are Credited

The reason why revenues are credited is that they increase the shareholders' equity of a business, and shareholders' equity has a natural credit balance. Thus, an increase in equity can only be caused by transactions that are credited. The foundation of this reasoning is the accounting equation, which is as follows:

Assets = Liabilities + Shareholders' equity

The accounting equation appears in the structure of the balance sheet, where assets (with natural debit balances) offset liabilities and shareholders' equity (with natural credit balances). When a sale occurs, the revenue (in the absence of any offsetting expenses) automatically increases profits - and profits increase shareholders' equity. Stated differently, the act of generating revenue also increases either cash or accounts receivable, which calls for an offsetting credit entry to equity.

Example of Revenues Being Credited

Here are several examples of revenues being credited:

Services sale. A company sells $5,000 of consulting services to a customer on credit. One side of the entry is a debit to accounts receivable, which increases the asset side of the balance sheet. The other side of the entry is a credit to revenue, which increases the shareholders' equity side of the balance sheet. Thus, both sides of the balance sheet remain in balance as a result of this transaction.
Accrued revenue. A business has an arrangement with a large customer, under which it is not allowed to bill the customer until a project has been completed, which will not happen for several months. At the end of the current month, the controller accrues $40,000 of earned but not billed revenue. When the company eventually completes the project, the controller will reverse all of the accrued revenue entries made up to that date and replace them with an invoice to the customer.