State BPA Fundamental Accounting Practice Exam

What is the normal balance for expense accounts?

1. Credit balance

2. Debit balance

3. No balance

4. Variable balance

The correct answer is: Debit balance

Expense accounts typically have a normal debit balance. This means that when an expense is incurred, it is recorded as a debit, which increases the expense account. The reason for this is rooted in the structure of the accounting equation and how financial statements are prepared. In accounting, the basic formula is Assets = Liabilities + Equity. Expenses impact equity negatively since they reduce net income. When an expense is recorded, it is recognized as a cost that has been incurred, thus decreasing the owner's equity. Since debits increase expense accounts and credits increase equity, maintaining a debit balance for expenses facilitates an accurate representation of the company's financial position. Consequently, whenever you look at an expense account, a debit balance indicates that expenses have been incurred, which is typically what stakeholders want to see for tracking profitability and operational costs. This understanding is fundamental to grasping basic accounting principles and the preparation of financial statements.