The excess credits (or debits) on the income statement are used to decrease (or increase) the equity account.

At the end of an accounting period the temporary income-statement accounts (revenues and expenses) are closed to a permanent equity account—Retained Earnings.
• If revenues (credits) exceed expenses (debits), the result is net income. Net income is recorded with a credit to Retained Earnings, which increases owners’ equity.
• If expenses (debits) exceed revenues (credits), the result is a net loss. Net loss is recorded with a debit to Retained Earnings, which decreases owners’ equity. Therefore, excess credits on the income statement increase—not decrease—equity, and excess debits decrease—not increase—equity. The statement given is the reverse of correct accounting treatment and is therefore false. Why the other option (“True”) is wrong: Selecting “True” would accept the inaccurate proposition that credits lower equity and debits raise equity. Authoritative accounting literature shows the opposite relationship, so “True” cannot be supported.

A. True: This option is incorrect. It endorses a statement that is the direct opposite of established Generally Accepted Accounting Principles (GAAP). Net income (excess credits) adds to equity, and a net loss (excess debits) subtracts from it.

References:
1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. In Section 2, "Financial Statement Fraud," under the subsection "Basic Accounting and Financial Theory," the manual explains the components of the accounting equation (Assets = Liabilities + Equity). It clarifies the relationship by stating, "Equity is increased by investments by owners (e.g., sale of stock) and revenues. It is decreased by dividends to owners and expenses." This directly contradicts the question's premise, confirming that revenues (which create the excess credits for net income) increase equity, while expenses (which create the excess debits for a net loss) decrease it.

2. Franklin, M., Graybeal, P., & Cooper, D. (2020). Principles of Accounting, Volume 1: Financial Accounting. OpenStax, Rice University. In Chapter 4, "The Accounting Cycle," Section 4.4, "Prepare Closing Entries," the text describes the closing process. It states: "The third closing entry closes the Income Summary account to the Retained Earnings account. The amount to close is the net income or net loss amount... If there is a net income (credit balance in Income Summary), the journal entry will debit Income Summary and credit Retained Earnings. This increases the balance in Retained Earnings." This confirms that an excess of credits (net income) increases equity.

3. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon.com. In Chapter 1, "Accounting and its Role in Managerial Decision Making," the text presents the Statement of Retained Earnings. The formula shown is: "Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings." This fundamental formula explicitly shows that Net Income is added to the beginning equity balance, thereby increasing it. A net loss would be subtracted, thereby decreasing it.

1. Kieso

D. E.

Weygandt

J. J.

& Warfield

T. D. Intermediate Accounting

17th ed.

Wiley

2019. Chapter 3 “The Accounting Information System

” pp. 118-120: discussion of closing entries transferring net income (credit) to Retained Earnings

thereby increasing equity.

2. Libby

R.

Libby

P. A.

& Short

D. G. Financial Accounting

10th ed.

McGraw-Hill

2020. Chapter 4 “Reporting and Interpreting Operating Performance

” pp. 173-175: explains that a credit balance of net income is posted to Retained Earnings

increasing stockholders’ equity; a debit balance for net loss decreases equity.

3. MIT OpenCourseWare. Course 15.514 “Financial & Managerial Accounting

” Session 5 Lecture Notes “Closing the Books

” slides 6-7: illustrates closing process where net income (credit) raises Retained Earnings and net loss (debit) lowers it.