What type of account would be credited if capital is being increased?

What type of account would be credited if capital is being increased?

• A. Revenue
• B. Asset
• C. Equity
• D. Liability

Answer: (C)

When capital is increased, it means that the owner's investment or equity in the business is growing. This increase is categorized under equity accounts in the financial statements, which reflect the ownership interest in the assets of the business after deducting liabilities. Crediting an equity account indicates that more investment has been added, whether through the owner's additional contributions or through retained earnings from profits. This is consistent with the accounting equation, where assets equal liabilities plus equity. Therefore, an increase in capital directly results in a credit to the equity side of this equation. In contrast, revenue accounts record sales and income transactions, asset accounts track resources owned by the business, and liability accounts represent obligations owed to external parties. While these accounts are essential for various transactions, they do not apply directly to the action of increasing capital in this context.

When capital is increased, it means that the owner's investment or equity in the business is growing. This increase is categorized under equity accounts in the financial statements, which reflect the ownership interest in the assets of the business after deducting liabilities.

Crediting an equity account indicates that more investment has been added, whether through the owner's additional contributions or through retained earnings from profits. This is consistent with the accounting equation, where assets equal liabilities plus equity. Therefore, an increase in capital directly results in a credit to the equity side of this equation.

In contrast, revenue accounts record sales and income transactions, asset accounts track resources owned by the business, and liability accounts represent obligations owed to external parties. While these accounts are essential for various transactions, they do not apply directly to the action of increasing capital in this context.