When you prepare a balance sheet for your business, income should appear in the "credit" section of the document. This terminology can be confusing because the term "credit" calls to mind credit cards and credit scores, which are associated with money that you owe. To clarify the issue, think of the term "credit" in terms of its meaning as an asset, such as when someone is referred to as a "credit" to the organization.
Definition of Income
Your income is the money you earn. It belongs on the credit portion of your balance sheet because it represents funds that have been credited to your bottom line, increasing your net worth. Income recorded as a credit on a balance sheet represents net income, or the amount that you actually earned after subtracting expenses.
The gross income for a business is the total amount it collects in exchange for products and services. This amount is considered a credit on an income statement, which calculates money that comes into a business and then calculates money that goes out in a separate portion of the document.
Net income is the amount that a business actually earns, once the receipts and expenses are tallied and set off against each other on an income statement. This amount is then transferred to the credit section of the balance sheet, where it represents the positive side of the equation. Net income is different from net worth, which is the product of comparing credits and debits on a balance sheet.
Although income is considered a credit rather than a debit, it can be associated with certain debits, especially tax liability. Because you usually owe taxes on your income, all credits stemming from income usually correspond with debits associated with tax liabilities.
Types of Income
Various types of income can appear as credits on a balance sheet. As we have seen, income from business earnings represents the amount that the business actually makes once its expenses have been subtracted. Other types of business income that can be listed as credits include interest and rental income, as well as royalties from intellectual property.
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