State BPA Fundamental Accounting Practice Exam

True or False: Whether a debit or credit increases or decreases an account's balance depends on the type of account.

1. True

2. False

3. Depends on the transaction

4. Always true

The correct answer is: True

The statement is true because the impact of debits and credits on an account's balance indeed varies according to the type of account being affected. In accounting, there are three primary categories of accounts: assets, liabilities, and equity. For asset accounts, debits increase the balance while credits decrease it. Conversely, for liability and equity accounts, credits increase the balance, while debits decrease it. This fundamental principle highlights the double-entry accounting system where each transaction affects at least two accounts, illustrating how the accounting equation remains balanced. Understanding this distinction is crucial for accurately recording and interpreting financial transactions. Therefore, the statement is correct, as the effects of debits and credits differ based on the specific nature of the account involved.