When revenue is debited, what effect does it have on equity?

• A. It increases equity
• B. It decreases equity
• C. It has no effect on equity
• D. It shifts equity to liabilities

Answer: (B)

When revenue is debited, it actually decreases equity. Revenue accounts normally carry a credit balance, meaning that increases in revenue are recorded as credits. By debiting a revenue account, you are effectively reducing the amount of revenue that has been recognized. Since the net income (which is part of equity) is influenced by revenue, reducing revenue results in a lower net income, and consequently, a decrease in equity.

This is important because equity represents the ownership interest in the company, which can be affected by various performance metrics. When revenue diminishes, it can lead to lower retained earnings, the component of equity that accumulates profits over time, thereby reducing total equity.