Future Business Leaders of America (FBLA) Accounting Practice Test

In accounting, what does "Expense" signify?

1. A decrease in liabilities

2. An increase in assets

3. A decrease in owner's equity

4. An increase in revenue

The correct answer is: A decrease in owner's equity

In accounting, "Expense" refers to any outflow of money or services that a business incurs in the process of generating revenue. Essentially, expenses are costs that a business must pay to operate and are recorded on the income statement. When expenses are recognized, they reduce the net income for the period, leading to a decrease in owner's equity. This reduction occurs because expenses directly impact the profits of the business, which, when declining, diminishes the equity held by the owners or shareholders. Understanding expenses as a decrease in owner's equity is fundamental to grasping how financial statements reflect a company's performance. This connection emphasizes the importance of managing expenses effectively to foster business profitability and maintain or grow owner's equity over time.