What is equity decreased by? A. Liabilities B. Assets C. Income D. Expenses
Question
What is equity decreased by? A. Liabilities B. Assets C. Income D. Expenses
Solution
Equity is decreased by expenses (Option D). Here's why:
Equity represents the residual interest in the assets of an entity after deducting liabilities. In other words, equity is what remains after you subtract what you owe (liabilities) from what you own (assets).
When a company incurs expenses, it often results in an outflow of assets (like cash or other resources). This outflow of assets reduces the company's equity.
For example, if a company pays rent for its office space, this payment (an expense) reduces the company's cash (an asset), which in turn reduces the company's equity.
So, equity is decreased by expenses.
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