State BPA Fundamental Accounting Practice Exam

What is the characteristic of a liability account's balance?

1. It usually has a debit balance

2. It usually has a credit balance

3. It can be either debit or credit

4. It is always zero

The correct answer is: It usually has a credit balance

A liability account typically has a credit balance because it represents obligations or debts that a business owes to external parties. When a company incurs a liability, an increase in that liability is recorded as a credit to the liability account, reflecting that the business has a growing obligation. Conversely, a decrease in liability, such as when a payment is made to settle that debt, is recorded as a debit. This fundamental characteristic aligns with the double-entry accounting system, where liabilities increase with credits and decrease with debits. Therefore, a credit balance in a liability account indicates that the business has obligations that need to be settled, which is a fundamental aspect of the financial position of the entity.