At the end of an accounting period, a company has a debit balance in a liability account. What does this indicate?

• A. The company has under deposited taxes withheld from employee wages
• B. The company has not yet paid the third party
• C. The company has withheld too much from the employee
• D. The company has paid to a third party more than was withheld from the employee

Answer: (D)

A liability account typically carries a credit balance, so a debit balance at the end of the period means the company has overpaid a liability or is due a refund. In payroll, amounts withheld from employees are recorded as a liability until they’re remitted to the tax authorities or other third parties. When the remittance is made, you debit the liability and credit cash. If the liability shows a debit balance, it means the company has paid more to the third party than was withheld from employees, i.e., an overpayment. The other scenarios would not produce a debit balance—under-deposited withholdings, not-yet-paid remittances, or over-withholding from employees would still leave the liability with a credit balance or reflect different timing.