Accounting Fundamentals Certification (AFC) Practice Test

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What does a debit entry typically signify in terms of liabilities?

Increase in a liability

No effect on liability

Decrease in a liability

A debit entry typically signifies a decrease in a liability. In accounting, the double-entry system is employed, where every transaction affects at least two accounts. For liability accounts, debits reduce the balance. This concept stems from the fundamental accounting equation, which states that assets equal liabilities plus equity. Therefore, when liabilities decrease, it generally indicates that the company has settled some debts or obligations, resulting in a lower liability balance.

This understanding is essential for anyone studying accounting, as it helps clarify how transactions impact financial statements and the overall financial position of a business. Recognizing the nature of debits and credits in relation to different types of accounts is crucial for accurate bookkeeping and financial reporting.

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Transfer of liability

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