hard · Financial Accounting accounting-cycle-financial-statements
A company prepares a worksheet. In the Income Statement columns, total debits are $410,000 and total credits are $465,000. In the Balance Sheet columns, total debits are $720,000 and total credits are $665,000. The bookkeeper, seeing the Income Statement credits exceed debits, writes the $55,000 balancing figure on the DEBIT side of the Income Statement columns and on the CREDIT side of the Balance Sheet columns, labeling it 'Net Income.'
Which statement correctly evaluates this treatment?
- The placement is correct and the labeling is correct: a $55,000 net income is entered as an Income Statement debit and a Balance Sheet credit, increasing retained earnings.
- The amount is right but the labels are reversed: credits exceeding debits in the Income Statement columns signal a net loss of $55,000, not net income.
- The placement is wrong: net income should be entered as an Income Statement credit and a Balance Sheet debit, so both columns are misbalanced.
- The $55,000 figure is correct in the Income Statement columns but should appear on the Balance Sheet DEBIT side, since income increases assets.
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