A credit may signify a
a. decrease in owner’s capital
b. decrease in assets
c. decrease in liabilities
d. decrease in revenue
The correct answer and explanation is:
Correct Answer: b. decrease in assets
In accounting, the term “credit” is part of the double-entry bookkeeping system. Every transaction has at least one debit entry and one credit entry to maintain the accounting equation:
Assets = Liabilities + Owner’s Equity
A credit entry can signify several things, depending on which type of account it affects. Here is how it works for different account types:
- Assets: A credit decreases asset accounts. For example, if a business pays off cash, the cash account (an asset) is credited, which reduces it.
- Liabilities: A credit increases liability accounts. If a business borrows money, the liability account (such as loans payable) is credited, indicating an increase in the amount owed.
- Owner’s Capital: A credit increases the owner’s equity or capital. When the owner invests in the business, the capital account is credited.
- Revenue: A credit increases revenue accounts. When a business earns income, it records revenue with a credit entry.
- Expenses and Drawings: These are reduced with a credit, but typically they are increased with debits.
In this case, the question asks which one a credit signifies a decrease in, and the best answer is “decrease in assets”. For example, if a business uses up inventory (an asset), or withdraws cash from the bank, the asset account is credited to show a reduction.
The other choices are incorrect:
- (a) A credit increases owner’s capital.
- (c) A credit increases liabilities, not decreases.
- (d) A credit increases revenue, not decreases.
Understanding how credits and debits function is fundamental to preparing accurate financial statements and maintaining balanced books. A credit’s effect always depends on the type of account being considered.