State BPA Fundamental Accounting Practice Exam

What is true about the normal balances of permanent accounts?

1. They can only have credit balances

2. They can only have debit balances

3. They have either debit or credit balances

4. They always have zero balances

The correct answer is: They have either debit or credit balances

Permanent accounts are accounts that carry their balances from one accounting period to the next; they are not closed at the end of the accounting year. These accounts typically include assets, liabilities, and equity accounts. The correct understanding of permanent accounts is that they can have either debit or credit balances, depending on the transactions affecting them. For example, asset accounts generally have debit balances, while liabilities usually have credit balances. Equity accounts can also have credit balances due to contributions and retained earnings, but they may show debit balances in the case of treasury stock or losses. Thus, the nature of these accounts allows for flexibility in their normal balances. This characteristic of having either debit or credit balances differentiates permanent accounts from temporary accounts, which are closed out at the end of each period and thus reset their balances to zero. The other options inaccurately restrict the nature of these accounts, overlooking their dual potential for balance types based on underlying transactions.