When assets decrease or liabilities increase, what is this action called?

When assets decrease or liabilities increase, this action is termed a credit. In accounting, a credit entry reflects an increase in liabilities or equity, or a decrease in assets. For instance, when a company takes out a loan, it incurs a liability, which requires a credit entry. Conversely, if a company sells an asset, it results in a decrease in that asset, also requiring a credit entry to balance the accounts.

In the context of double-entry bookkeeping, every transaction affects at least two accounts. A credit will typically be accompanied by a corresponding debit, which reflects an opposite effect in the accounting equation. Thus, recognizing the nature of credits is essential to understanding how financial transactions impact a business's financial statements.

Understanding this mechanism is crucial for performing accurate financial analysis and ensuring that the balance sheet maintains its integrity.