Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Assets increase by $500
B
Liabilities decrease by $500
C
Equity decreases by $500
D
Assets decrease by $500
Understanding the Answer
Let's break down why this is correct
Answer
In a T-account for a bank, debits and credits must always balance, meaning they should equal each other. When the bank's reserves increase by $500, this means the bank has more money available to lend or use. In the balance sheet equation, which is Assets = Liabilities + Equity, the increase in reserves counts as an asset. Therefore, if the reserves increase, the total assets of the bank also increase by $500. Since the debits equal the credits in the T-account, this increase will not affect the overall balance of liabilities and equity; it simply shows that the bank has more assets available.
Detailed Explanation
When reserves go up, it means the bank has more cash. Other options are incorrect because Some might think that increasing reserves means the bank owes less; Equity is the bank's ownership value.
Key Concepts
debits and credits
balance sheet equation
accounting principles
Topic
T-Accounts and Bank Reserves
Difficulty
hard level question
Cognitive Level
understand
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