A credit may signify a
a. decrease in assets
b. decrease in liabilities
c. decrease in capital
d. decrease in revenue
Which of the following describes the classification and normal balance of the fees earned account?
a. asset, credit
b. liability, credit
c. owner’s equity, debit
d. revenue, credit
The Correct Answer and Explanation is :
Correct Answers:
- A credit may signify a:
- Answer: b. decrease in liabilities Explanation: In accounting, credits and debits represent opposite effects on various accounts. A credit typically causes the following effects:
- Increase in liabilities: A credit to a liability account increases the balance (such as accounts payable).
- Increase in owner’s equity: A credit to an equity account (like capital or retained earnings) increases the balance.
- Decrease in assets: A credit to an asset account (such as cash or equipment) reduces the balance.
- Decrease in revenue: A credit to a revenue account (like sales or fees earned) reduces the balance (though it typically increases equity in a revenue account). Since liabilities increase with a credit entry, a credit typically signifies a decrease in assets or a decrease in equity in many contexts, but more specifically, it can represent a decrease in liabilities when a payment is made or when the obligation is reduced.
- Classification and normal balance of the fees earned account:
- Answer: d. revenue, credit Explanation: The fees earned account is classified under revenue. In accounting, revenues are amounts earned by a company from its business activities, such as the provision of services or the sale of goods. The normal balance of revenue accounts is a credit, meaning they are increased with a credit entry. Revenue accounts typically increase owners’ equity, as earnings contribute to the growth of a company’s net worth. When fees are earned, the company recognizes the income, which is credited to the fees earned account. This increases the revenue (and, by extension, equity), reflecting the increase in the company’s value through its business operations. Conversely, to decrease revenue, you would make a debit entry to the revenue account. To summarize, a credit in the fees earned account increases revenue, and the normal balance for this account is a credit because it increases equity by recognizing earned income.