When a company incurs an expense, what is the likely effect on owner's equity?

When a company incurs an expense, what is the likely effect on owner's equity?

• A. It increases
• B. It decreases
• C. No effect
• D. It fluctuates

Answer: (B)

When a company incurs an expense, it represents a cost incurred in the process of generating revenue. This expense reduces the net income for the period, as net income is calculated by subtracting total expenses from total revenues. Since net income ultimately impacts retained earnings, a component of owner's equity, any reduction in net income directly leads to a decrease in owner's equity. Retained earnings reflect the cumulative amount of net income that has been retained in the business rather than distributed as dividends. When expenses increase, they diminish net income and, consequently, the retained earnings. This relationship illustrates how expenses can negatively influence the overall equity that owners have in the company, resulting in a decrease in owner's equity.

When a company incurs an expense, it represents a cost incurred in the process of generating revenue. This expense reduces the net income for the period, as net income is calculated by subtracting total expenses from total revenues. Since net income ultimately impacts retained earnings, a component of owner's equity, any reduction in net income directly leads to a decrease in owner's equity.

Retained earnings reflect the cumulative amount of net income that has been retained in the business rather than distributed as dividends. When expenses increase, they diminish net income and, consequently, the retained earnings. This relationship illustrates how expenses can negatively influence the overall equity that owners have in the company, resulting in a decrease in owner's equity.