Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What is the function of a CREDIT in a General Ledger?

1. Decrease in cash

2. Inflows of cash and decrease in assets

3. Increases in cash and decreases in liabilities

4. Decreases in expenses

The correct answer is: Increases in cash and decreases in liabilities

In accounting, the function of a credit in a General Ledger typically refers to a method used to record transactions that affect various accounts. Specifically, when a credit is applied to an account, it can represent an increase in certain types of accounts or a decrease in others. The correct response reflects that a credit can lead to increases in cash and decreases in liabilities. For instance, if a business receives cash from customers, this transaction is recorded as a credit to the cash account, increasing the total cash on hand. At the same time, if the cash received corresponds to previously owed liabilities, it may result in a credit to the liabilities account, indicating a decrease in what the business owes. While credits may involve various combinations of cash flows and affect different accounts, understanding that they can signify both increases in cash as well as reductions in previously incurred liabilities is crucial to mastering the General Ledger concepts. This knowledge is essential in financial reporting and managing a company's financial statements accurately.