When assets decrease or liabilities increase, what is this action called?

When assets decrease or liabilities increase, what is this action called?

• A. Expense
• B. Debt
• C. Credit
• D. Debit

Answer: (C)

When assets decrease or liabilities increase, this action is termed a credit. In accounting, a credit entry reflects an increase in liabilities or equity, or a decrease in assets. For instance, when a company takes out a loan, it incurs a liability, which requires a credit entry. Conversely, if a company sells an asset, it results in a decrease in that asset, also requiring a credit entry to balance the accounts. In the context of double-entry bookkeeping, every transaction affects at least two accounts. A credit will typically be accompanied by a corresponding debit, which reflects an opposite effect in the accounting equation. Thus, recognizing the nature of credits is essential to understanding how financial transactions impact a business's financial statements. Understanding this mechanism is crucial for performing accurate financial analysis and ensuring that the balance sheet maintains its integrity.

When assets decrease or liabilities increase, this action is termed a credit. In accounting, a credit entry reflects an increase in liabilities or equity, or a decrease in assets. For instance, when a company takes out a loan, it incurs a liability, which requires a credit entry. Conversely, if a company sells an asset, it results in a decrease in that asset, also requiring a credit entry to balance the accounts.

In the context of double-entry bookkeeping, every transaction affects at least two accounts. A credit will typically be accompanied by a corresponding debit, which reflects an opposite effect in the accounting equation. Thus, recognizing the nature of credits is essential to understanding how financial transactions impact a business's financial statements.

Understanding this mechanism is crucial for performing accurate financial analysis and ensuring that the balance sheet maintains its integrity.