Multiple Choice
If debits equal credits in a company's accounting records, which of the following statements is true according to the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Which of the following best describes the effect of recording an expense on the fundamental accounting equation?
A
It has no effect on owner's equity.
B
It increases assets.
C
It increases liabilities.
D
It decreases owner's equity.
Verified step by step guidance1
Understand the fundamental accounting equation: Assets = Liabilities + Owner's Equity. This equation must always remain balanced.
Recognize that expenses are costs incurred by a business to generate revenue. Recording an expense reduces the net income of the business.
Recall that net income directly impacts owner's equity. When expenses increase, net income decreases, which in turn reduces owner's equity.
Analyze the options provided: Recording an expense does not increase assets or liabilities, nor does it leave owner's equity unchanged. Instead, it decreases owner's equity.
Conclude that the correct effect of recording an expense is a decrease in owner's equity, as expenses reduce the profitability of the business.
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