Accounting Fundamentals Certification (AFC) Practice Test

A Liability Account typically has a credit balance. This is an essential principle in accounting that aligns with the accounting equation, which states that assets equal liabilities plus equity. Since liabilities represent obligations or debts that a business owes to external parties, they are recorded on the right side of the balance sheet and are increased with credits.

When a business incurs a liability, it credits the respective liability account, signifying an increase in the amount owed. Conversely, when a liability is settled or decreased, the account is debited. Therefore, understanding that liability accounts maintain a credit balance is fundamental for accurate financial reporting and bookkeeping.

In contrast, options like debit balance and negative balance do not correctly represent the standard accounting treatment for liabilities. A debit balance is characteristic of asset accounts or expense accounts, while a negative balance typically implies an unconventional situation not usual for liability accounts. No balance would suggest that an account has not been used, which does not pertain to the general functioning of liability accounts that constantly track obligations.