State BPA Fundamental Accounting Practice Exam

Which of the following statements about accounting balances is correct?

1. All accounts have the same normal balance type

2. Assets typically decrease with credits

3. Liabilities typically increase with debits

4. The normal balance type varies by account category

The correct answer is: The normal balance type varies by account category

The correct statement is that the normal balance type varies by account category. In accounting, each account type has a designated normal balance, which indicates whether it generally has a debit or credit balance. For example, asset accounts usually have a normal debit balance, meaning they increase with debits and decrease with credits. Conversely, liability accounts typically have a normal credit balance, increasing with credits and decreasing with debits. Equity accounts, similarly, have a normal credit balance but may also vary based on specific circumstances like retained earnings. Understanding these normal balances is crucial for accurately recording transactions and maintaining correct financial records. This variation allows accountants to ensure that the accounting equation (Assets = Liabilities + Equity) remains in balance. Thus, recognizing that the normal balance type varies across different account categories is fundamental to practicing sound accounting principles.