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In financial accounting, the best interpretation of the word "credit" is the:
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2. Transaction Analysis
Journal Entries: Debits and Credits
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In double-entry accounting, how are decreases to liability accounts recorded?
A
They are not recorded because liabilities decrease automatically when assets are paid
B
As a debit
C
As a credit
D
As a debit if the decrease is paid in cash, otherwise as a credit
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Understand the basic principle of double-entry accounting: every transaction affects at least two accounts, with debits equaling credits.
Recall the normal balance of liability accounts: liabilities normally have a credit balance, meaning increases to liabilities are recorded as credits.
Recognize that to decrease a liability account, you must do the opposite of increasing it, which means recording a debit entry.
Note that the method of payment (cash or otherwise) does not change the fundamental rule that decreases to liabilities are recorded as debits.
Therefore, decreases to liability accounts are recorded as debits to reflect the reduction in the amount owed.
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