The excess credits (or debits) on the income statement are used to decrease (or increase) the equity account.
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A. B.B
The correct answer is B. False.
Excess credits or debits on the income statement are not used to directly decrease or increase the equity account. The income statement, also known as the statement of comprehensive income or profit and loss statement, presents a company's revenues, expenses, gains, and losses over a specific period of time. It is one of the financial statements used to assess a company's financial performance.
The income statement is structured in a way that shows the company's revenues and gains, which are recorded as credits, and its expenses and losses, which are recorded as debits. The excess of revenues and gains over expenses and losses results in a net income, which is recorded as a credit. Conversely, if expenses and losses exceed revenues and gains, it leads to a net loss, which is recorded as a debit.
The equity account, on the other hand, represents the ownership interest in a company. It includes the initial investments made by shareholders, any additional capital contributions, retained earnings, and other comprehensive income. Equity is reported on the balance sheet, which is a different financial statement.
The net income or net loss from the income statement does indirectly affect the equity account. At the end of each accounting period, the net income or net loss is transferred to the retained earnings account within the equity section of the balance sheet. Retained earnings represent the accumulated profits or losses of the company over time. Net income increases retained earnings, while net loss decreases them.
To summarize, excess credits or debits on the income statement do not directly impact the equity account. Instead, the net income or net loss derived from the income statement is indirectly reflected in the equity account through the retained earnings component of the balance sheet. Therefore, the statement "The excess credits (or debits) on the income statement are used to decrease (or increase) the equity account" is false.