Multiple Choice
Which of the following statements best describes the effect of expenses on equity according to the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
Which of the following is a permanent account?
A
Rent Expense
B
Retained Earnings
C
Dividends
D
Service Revenue
Verified step by step guidance1
Understand the difference between permanent and temporary accounts. Permanent accounts (also known as real accounts) are not closed at the end of the accounting period and their balances are carried forward to the next period. Examples include assets, liabilities, and equity accounts. Temporary accounts (nominal accounts), such as revenues, expenses, and dividends, are closed at the end of the period.
Analyze each option provided in the question: Rent Expense, Retained Earnings, Dividends, and Service Revenue. Determine whether each is a permanent or temporary account based on its nature.
Rent Expense is a temporary account because it is an expense account, and all expense accounts are closed at the end of the accounting period.
Dividends is also a temporary account because it represents distributions to shareholders and is closed to Retained Earnings at the end of the period.
Retained Earnings is a permanent account because it is part of the equity section of the balance sheet and its balance is carried forward to the next accounting period. Service Revenue is a temporary account because it is a revenue account and is closed at the end of the period.
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