Which two accounting rules explain how account balances increase according to the fundamental accounting equation?

• A. Assets increase with credits; Equity increases with debits.
• B. Assets increase with debits; Liabilities and Equity increase with credits.
• C. Liabilities and Equity increase with debits; Assets increase with credits.
• D. Assets and Liabilities both increase with debits.

Answer: (B)

Verified step by step guidance

1. Understand the fundamental accounting equation: Assets = Liabilities + Equity. This equation forms the basis of double-entry accounting.
2. Learn the rules of debit and credit: In accounting, debits and credits are used to record changes in account balances. Debits increase asset accounts and decrease liability and equity accounts, while credits decrease asset accounts and increase liability and equity accounts.
3. Analyze the options provided in the problem: The correct rule is that assets increase with debits, while liabilities and equity increase with credits. This aligns with the fundamental accounting equation and the rules of debit and credit.
4. Eliminate incorrect options: For example, 'Assets increase with credits; Equity increases with debits' is incorrect because assets increase with debits, not credits. Similarly, 'Liabilities and Equity increase with debits; Assets increase with credits' is incorrect because liabilities and equity increase with credits, not debits.
5. Confirm the correct answer: The correct explanation is 'Assets increase with debits; Liabilities and Equity increase with credits,' as this follows the rules of debit and credit in accounting.