Multiple Choice
Each time a financial transaction occurs, you must record a journal entry that includes which of the following?
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2. Transaction Analysis
Journal Entries: Debits and Credits
Multiple Choice
In the context of journal entries, which of the following best describes a credit?
A
An entry that increases a liability or equity account, or decreases an asset account
B
An entry that decreases both liability and equity accounts
C
An entry that always increases an asset account
D
An entry that is only used for recording cash transactions
Verified step by step guidance1
Understand the concept of a credit in accounting: A credit is one side of a journal entry that affects accounts in the ledger. It can either increase or decrease an account depending on the type of account being affected.
Recall the accounting equation: Assets = Liabilities + Equity. This equation helps determine how credits and debits affect different accounts.
Analyze the impact of a credit on different account types: Credits increase liability and equity accounts, while they decrease asset accounts. This is a fundamental rule in double-entry accounting.
Eliminate incorrect options: For example, a credit does not always increase an asset account, nor is it only used for recording cash transactions. These statements are inconsistent with the rules of accounting.
Select the correct description: Based on the rules of accounting, the correct description of a credit is 'An entry that increases a liability or equity account, or decreases an asset account.'
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