Which statement best describes the effect of debits and credits on asset and liability/equity accounts?

• A. Debits always increase liabilities; credits always increase assets.
• B. Debits decrease assets; credits decrease liabilities.
• C. Debits have no effect; credits have no effect.
• D. Debits increase assets; credits increase liabilities and equity; for assets, debits increase; for liabilities and equity, credits increase.

Answer: (D)

In double-entry accounting, assets have a normal debit balance and liabilities/equity have a normal credit balance. That means debits increase asset balances, while credits increase liability and equity balances. Conversely, credits decrease assets and debits decrease liabilities/equity. The statement captures this: debits increase assets; credits increase liabilities and equity; for assets, debits increase; for liabilities and equity, credits increase.

Examples help: buying equipment for cash increases an asset, so you debit Equipment. The Cash asset is reduced with a credit. Borrowing money increases cash (debit) and increases the liability (credit) as Notes Payable.