Verbal Reasoning Test Question 5

Double-entry book keeping is a system of accounting. It entails each transaction being listed in at least two different ledger accounts. Each transaction is recorded as a debit in one account, and a credit in the other. The debits and credits must cancel one another out. Although the layperson considers crediting as an increase in something, whether or not a credit increases the value of the account is dependent upon the type of account. For instance, debiting an asset is an increase in the asset. The accounting equation (also known as the golden rule of accounting) need always be remembered. That is, equity=assets – liabilities. Put another way, assets=equity + liabilities. That is, the balance sheet must balance.