State BPA Fundamental Accounting Practice Exam

Which account typically has a credit balance?

1. Assets

2. Expenses

3. Sales Tax Payable

4. Drawings

The correct answer is: Sales Tax Payable

The account that typically has a credit balance is the Sales Tax Payable account. This account represents a liability for the business, as it records the amount of sales tax collected from customers that needs to be remitted to the tax authorities. In accounting, liability accounts have a natural credit balance because they indicate obligations to pay others. Liabilities are increased by credits and decreased by debits. Therefore, when a sale occurs and sales tax is collected, the Sales Tax Payable account is credited to reflect the increase in the company's obligation. When the business later pays the tax, the account will be debited to decrease the liability. In contrast, asset accounts, expense accounts, and drawings typically have debit balances. Assets represent resources owned by a business and are increased with debits. Expenses reflect costs incurred during operations and also carry debit balances. Drawings, which involve amounts withdrawn by owners from the business for personal use, are considered reductions of equity and likewise have a debit balance.