State BPA Fundamental Accounting Practice Exam

Which statement is true regarding liability accounts?

1. They usually have a debit balance

2. They always have a credit balance

3. They can fluctuate between debit and credit

4. They must start with zero balance

The correct answer is: They always have a credit balance

Liability accounts are a fundamental aspect of accounting as they represent obligations that a business has to settle in the future, typically through the transfer of economic benefits such as cash, goods, or services. According to the rules of double-entry accounting, liability accounts typically have a credit balance. When a liability is incurred, such as taking out a loan or receiving goods on credit, the account is credited, reflecting an increase in obligations. Conversely, when a payment is made towards a liability, the account is debited, reducing the obligation. The stability of liability accounts typically means they do not fluctuate between debit and credit balances under normal circumstances. They start with a credit balance upon being established and maintain that credit balance as long as the business owes money or has obligations to others. Therefore, it is accurate to say that liability accounts always maintain a credit balance, aligning with accepted accounting principles and practices.