What term denotes a decrease in owners' equity?

What term denotes a decrease in owners' equity?

• A. Income
• B. Balance Sheet
• C. Expense
• D. Drawer

Answer: (C)

This concept centers on how costs affect owners' equity. Expenses reduce net income, and net income is part of retained earnings, which is a component of owners’ equity. So recording an expense lowers the company’s profits and, after closing the books, reduces retained earnings, diminishing owners’ equity. For example, paying utilities increases expenses on the income statement and, through lower net income, decreases the equity shown on the balance sheet. Income would increase equity, not decrease. A balance sheet is a financial statement, not a term describing a change in equity. A drawer represents owner withdrawals, which also reduce equity, but it’s a specific transaction rather than the general category of reducing equity through expenses. In this context, expense is the most direct and widely applicable term for a decrease in owners’ equity.

This concept centers on how costs affect owners' equity. Expenses reduce net income, and net income is part of retained earnings, which is a component of owners’ equity. So recording an expense lowers the company’s profits and, after closing the books, reduces retained earnings, diminishing owners’ equity. For example, paying utilities increases expenses on the income statement and, through lower net income, decreases the equity shown on the balance sheet.

Income would increase equity, not decrease. A balance sheet is a financial statement, not a term describing a change in equity. A drawer represents owner withdrawals, which also reduce equity, but it’s a specific transaction rather than the general category of reducing equity through expenses. In this context, expense is the most direct and widely applicable term for a decrease in owners’ equity.