Effects of Advertising Revenue on the Accounting Equation
Advertising revenue is money you receive from advertisements you allow others to pay you to place on something you own. Advertising revenue can be an ad on a website, commercial time on television or radio or billboards on buildings. Ad revenue represents profit and increases owner's equity and assets in the accounting equation. However, because you subtract expenses from revenue before you combine the figure with equity, revenue will only show an increase to equity and assets when revenues are higher than expenses.
The accounting equation, assets = liabilities + equity, is the foundation of the double-entry bookkeeping system and must always be in balance. The accounting equation is in balance when total assets equal liabilities plus equity. The advertisement revenue account balance makes its way to the equity account through the income statement, a subaccount of equity, as a part of the end of accounting period account-closing process.
Advertising revenue, as the name implies, is a revenue account. Accounting classifies revenue accounts as income statement accounts and nominal or temporary accounts. Revenue accounts are nominal or temporary accounts because they do not directly appear in the accounting equation the way other types of accounts like assets, liabilities and equity accounts do.
Revenue accounts are income statement accounts, because at the end of an accounting period or fiscal year, you close revenue accounts, along with expense accounts, into the income statement account. To close an account, you offset the balance in the account with an equal, opposite entry and create an opposite entry to move the funds to a different account -- in this case, the income statement account.
For example, assume the advertising revenue account has a normal credit balance of $300. An account's normal balance is debit or credit depending on which side increases the value of the account. Debit the advertising revenue account for $300 to close the account. Credit the income statement for $300 to move the account to the income statement.
Owner's equity is what belongs to the owner of the company. The owner may be a sole proprietor, a partnership or a group or stockholders. When closing accounts at the end of an accounting period, close the income statement account into the owner's equity account. The income statement is also called the profit or loss report and the revenue and expense statement. If revenues are higher than expenses in the income statement, your company has made a profit for the accounting period and profit increases owner's equity. If expenses are higher than revenue in the income statement, your company has lost money for the accounting period and losses decrease owner's equity.
For example, if the income statement has $300 (credit) revenue and $100 (debit) expense, the income statement shows a $200 (credit) profit, which will increase owner's equity by $200.