Question

Since revenues and expenses are associated with shareholders' equity, revenues and expenses must have their normal balances on the same side of a T account.

Select one:
A. True
B. False

Answer 1

B. False

Step-by-step explanation:

In accounting, the normal balances of revenues and expenses are on opposite sides of a T account. Revenues have a natural credit balance, while expenses have a natural debit balance.

Revenues increase shareholders' equity and have a credit balance, typically recorded on the credit side of the T account. Conversely, expenses decrease shareholders' equity and have a debit balance, usually recorded on the debit side of the T account.

The fundamental accounting equation states that Assets = Liabilities + Shareholders' Equity. Revenues increase shareholders' equity, whereas expenses decrease it. As both revenues and expenses affect shareholders' equity but have opposite effects, they appear on different sides of the T account: revenues on the credit side and expenses on the debit side.

This separation helps in understanding the financial performance of a company. By recording revenues and expenses on different sides, it enables a clear representation of the company's income (revenues) and its costs (expenses), making it easier to calculate the net income or loss and evaluate the overall financial health of the business. Therefore, revenues and expenses having their normal balances on the same side of a T account contradicts the fundamental principles of accounting.

Answer 2

The statement is false; revenues have a normal credit balance increasing equity, while expenses have a normal debit balance decreasing equity, placing them on opposite sides of a T-account.

Step-by-step explanation:

The statement that since revenues and expenses are associated with shareholders' equity, revenues and expenses must have their normal balances on the same side of a T account is False. In accounting, the normal balance for revenues is on the credit (right) side as they increase equity. On the other hand, expenses have their normal balance on the debit (left) side because they decrease equity. It's fundamental to grasp that while both accounts affect shareholders' equity, they do so in opposite ways and therefore are on different sides of a T-account.