State BPA Fundamental Accounting Practice Exam

What occurs when you reduce a liability account?

1. You debit the account

2. You credit the account

3. You transfer to an expense

4. You do not record anything

The correct answer is: You debit the account

When you reduce a liability account, you debit that account. In accounting, liabilities represent obligations that a business owes to external parties, such as loans, accounts payable, or accrued expenses. Debiting a liability account decreases its balance. This change reflects that the company has paid off part of its debt or reduced its obligation in some way. For instance, if a company reduces its accounts payable by paying a vendor, it will debit the accounts payable account, signaling a decrease in the amount owed. Understanding the double-entry bookkeeping system helps clarify this process. Every financial transaction affects at least two accounts: when you debit a liability account, you typically would also credit another account, such as cash or an asset account, to reflect the flow of money or resources within the business. Options that suggest crediting the account or transferring to an expense do not align with the fundamental principles of accounting related to liability accounts. Additionally, the idea of not recording anything contradicts the necessity of documenting financial transactions to maintain accurate accounting records.