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

In financial terms, what does DEBIT represent on a General Ledger?

1. Increases in liabilities

2. Outflows of cash and increases in assets

3. Increases in equity

4. Inflows of cash

The correct answer is: Outflows of cash and increases in assets

In financial accounting, a DEBIT on a General Ledger is used to record outflows of cash or increases in assets. This means when a company acquires an asset or when cash is spent, it is categorized as a debit. For example, purchasing equipment would result in an increase in the asset account for that equipment, and thus a corresponding debit entry is made. This understanding stems from the basic accounting equation: Assets = Liabilities + Equity. When an asset increases, it is reflected as a debit. This is foundational in double-entry bookkeeping, where for every debit entry recorded, there must be an equal and opposite credit entry recorded elsewhere, maintaining the balance of the accounting equation. In contrast, the other options do not accurately reflect the definition of a debit. Increases in liabilities or equity would be credited, while inflows of cash would also be represented as credits, since an increase in cash is an increase in an asset. Understanding these terms is crucial for accurately managing and interpreting financial records within an organization.