What does a 'credit' do in accounting?

In accounting, a 'credit' serves a specific purpose within the double-entry accounting system, which ensures that every transaction affects at least two accounts. When a credit entry is made, it typically results in a decrease in asset accounts and expenses, while simultaneously increasing liability or equity accounts.

For example, when a company takes out a loan, it receives cash (an increase in assets), but also incurs a liability; this would be recorded with a credit to the liability account. This relationship emphasizes the comprehensive nature of accounting, showing how funds and responsibilities move through an organization.

The correct choice highlights this fundamental characteristic of credits in accounting by correctly indicating that they affect both sides of the accounting equation—decreasing assets and expenses while increasing liabilities or equity. Understanding this helps in grasping the basic principles behind how financial statements are constructed and how companies report their financial health.