Multiple Choice
Mandy took out a \$35 loan from the bank. Which of the following is the correct journal entry to record this transaction?
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2. Transaction Analysis
Journal Entries: Debits and Credits
Multiple Choice
When recording journal entries, which of the following statements about debits and credits is correct?
A
Debits increase asset accounts and decrease liability accounts.
B
Credits increase both asset and expense accounts.
C
Debits always decrease equity accounts.
D
Credits decrease liability accounts and increase asset accounts.
Verified step by step guidance1
Understand the basic principles of debits and credits: In accounting, debits and credits are used to record transactions in the ledger. Debits are recorded on the left side of an account, while credits are recorded on the right side.
Learn the impact of debits and credits on different types of accounts: Debits increase asset and expense accounts, while they decrease liability, equity, and revenue accounts. Credits, on the other hand, increase liability, equity, and revenue accounts, while they decrease asset and expense accounts.
Analyze the first statement: 'Debits increase asset accounts and decrease liability accounts.' This is correct because debits increase assets (e.g., cash, inventory) and decrease liabilities (e.g., loans payable).
Evaluate the second statement: 'Credits increase both asset and expense accounts.' This is incorrect because credits decrease asset accounts and expense accounts, not increase them.
Review the remaining statements: 'Debits always decrease equity accounts' is incorrect because debits can increase equity accounts in certain cases (e.g., withdrawals). 'Credits decrease liability accounts and increase asset accounts' is also incorrect because credits increase liabilities and decrease assets.
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