Question

In the context of business accounting, which of the following applications of the rules of debit and credit is true?

a) Debit increases expenses; credit increases assets.
b) Debit decreases liabilities; credit decreases equity.
c) Debit increases revenue; credit increases liabilities.
d) Debit increases assets; credit decreases expenses.

Answer 1

The correct application of the rules of debit and credit is that a debit increases assets and decreases liabilities, while a credit does the opposite. This is essential for maintaining the balance in a T-account, where assets equal liabilities plus net worth.

Step-by-step explanation:

In the context of business accounting, the application of the rules of debit and credit includes different effects on the various types of accounts. Specifically, the correct option that represents these rules is: Debit increases assets; credit decreases expenses.

Every transaction in accounting is recorded as either a debit or a credit and this alters the balances of different account types. For instance, when you debit an expense account, you increase its value, because expenses are debited when they rise and credited when they decrease. Conversely, assets increase with debits and decrease with credits. Therefore, options a, b, and c contain incorrect applications of these rules, whereas option d is partially incorrect because a credit would not decrease expenses but rather decrease equity, liabilities, or revenue.

To summarize: Debit increases assets and a debit decreases liabilities; this is opposite for credits, which help balance the equation in a T-account where assets will always equal liabilities plus net worth.