The typical balance of a liability account is ____________?
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Answer: B. Credit balance
Explanation
Liability accounts have normal credit balances, meaning increases are recorded as credits and decreases as debits. Since liabilities represent claims against company resources, their structural accounting balance is always a credit. Establishing obligations through borrowing or purchases naturally increments the account via credit entries. The fundamental accounting equation dictates that assets equal liabilities plus owner equity balances. Credit entries increase liability and equity accounts while simultaneously decreasing various asset accounts. Debit entries are required to settle or reduce outstanding liability balances over time.
When a business takes out a bank loan, the corresponding liability account is established with a credit. Balance sheet presentations display liabilities with their normal credit balances to reflect financial obligations. Auditors verify liability balances by confirming that normal credit rules were followed in the ledger. A debit balance represents the normal characteristic of asset and expense accounts rather than liabilities. Cash balance refers to a specific liquid asset account rather than the general nature of liabilities. Neither debit nor credit balance is wrong because every standard account must adhere to double-entry rules.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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