Future Business Leaders of America (FBLA) Accounting Practice Test

What does the term 'Credit' indicate in a T Account?

1. Money received by the business

2. Debts owed by the business

3. An increase in liability or equity

4. A decrease in assets or expenses

The correct answer is: An increase in liability or equity

The term 'Credit' in a T Account reflects an increase in either liability or equity. In accounting, T Accounts are used to visually represent how transactions affect different accounts. When an account is credited, it generally means that the obligations or claims against the business's assets are increasing. For example, if a company takes a loan, the liabilities increase as the company now owes money, which is recorded on the credit side of the T Account. Similarly, if additional capital is invested by owners, equity increases, and this transaction is also recorded as a credit. Understanding this concept is crucial because it lays the foundation for the double-entry accounting system, where every financial transaction impacts at least two accounts. The dual effect ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced, thus maintaining the integrity of financial statements. By recognizing that a credit indicates an increase in these specific areas, you'll be better equipped to analyze and record financial transactions accurately.