Which term represents a decrease in owners' equity?

Which term represents a decrease in owners' equity?

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

Answer: (C)

A decrease in owners' equity comes from costs that eat into the profits the business earns. When the business records an expense, it lowers net income for the period. Lower net income reduces retained earnings, which are part of owners' equity on the balance sheet. So expenses directly reduce the total equity the owner has in the business. Income, by contrast, increases owners' equity because it raises net income. A balance sheet is a financial statement, not a term that describes a change in equity. A drawing (withdrawal) also reduces owners' equity, but the term in this context is specifically tied to expenses affecting the income statement and the resulting impact on retained earnings.

A decrease in owners' equity comes from costs that eat into the profits the business earns. When the business records an expense, it lowers net income for the period. Lower net income reduces retained earnings, which are part of owners' equity on the balance sheet. So expenses directly reduce the total equity the owner has in the business.

Income, by contrast, increases owners' equity because it raises net income. A balance sheet is a financial statement, not a term that describes a change in equity. A drawing (withdrawal) also reduces owners' equity, but the term in this context is specifically tied to expenses affecting the income statement and the resulting impact on retained earnings.