Which statement correctly pairs expenses and losses?

Which statement correctly pairs expenses and losses?

• A. Both decrease equity
• B. Both increase equity
• C. Expenses increase assets
• D. Losses increase revenue

Answer: (A)

Expensive activity and losses both reduce what the owners claim on the business. When expenses occur, they lower net income, and that drop flows into retained earnings, which is a component of equity. Losses work the same way: they reduce net income and hence reduce retained earnings, lowering overall equity. So both expenses and losses shrink the owners’ equity, while revenue increases it. The other ideas don’t fit because expenses don’t increase assets or equity, and losses aren’t the same as revenue.

Expensive activity and losses both reduce what the owners claim on the business. When expenses occur, they lower net income, and that drop flows into retained earnings, which is a component of equity. Losses work the same way: they reduce net income and hence reduce retained earnings, lowering overall equity. So both expenses and losses shrink the owners’ equity, while revenue increases it.

The other ideas don’t fit because expenses don’t increase assets or equity, and losses aren’t the same as revenue.