How does a credit affect the accounting equation?

The accounting equation states that assets equal liabilities plus equity (Assets = Liabilities + Equity). When we look at how credit affects this equation, we see that a credit entry typically refers to increasing a liability or equity account or decreasing an asset or expense account.

In this context, when a credit is applied, it often leads to a decrease in assets. For instance, when a business recognizes a credit sale, its accounts receivable (an asset) may decrease as it records the sales revenue. Essentially, focusing on the mechanics of double-entry accounting, a credit to an asset account means that the overall assets decrease, which directly impacts the balance in the accounting equation.

Understanding this principle helps clarify why the choice of decreasing assets as the effect of a credit is the accurate answer. Other choices, such as increasing assets or increasing profits, would not align with the fundamental principle of accounting that credits affect asset balances negatively when they are recorded. Similarly, decreasing expenses does not directly relate to how a credit functionally operates within the accounting equation framework.