Final answer:
When a company's total assets increase, there must be a corresponding increase in liabilities, common stock, or retained earnings, according to the fundamental accounting equation. This is reflected in a firm's T-account, where the total assets on one side must equal the total liabilities plus shareholders' equity on the other.
Step-by-step explanation:
If total assets increase in a company's balance sheet, it implies that there has been an equivalent increase in either liabilities, common stock, or retained earnings. This reflects the fundamental accounting equation where Assets = Liabilities + Shareholder's Equity. Shareholder's Equity can further be broken down into common stock and retained earnings. Hence, the correct answer is D. Liabilities, common stock, or retained earnings must increase.
For instance, if a business takes a loan, its assets (cash on hand) would increase, but so would its liabilities (loan to repay). Similarly, if a firm issues stock, its assets increase with the incoming capital from the sale, and its common stock category within equity also increases. If a business earns a profit and does not distribute it as dividends, this profit adds to its retained earnings, again increasing assets and equity.
Furthermore, a T-account helps visualize this relationship in your balance sheet. The left side shows assets, and the right side splits into liabilities and net worth. Net worth consists of elements like common stock and retained earnings which when combined with liabilities must balance out the total assets.