Question

Which of the following statements best describes one effect of recognizing expenses incurred by a business entity?

a.Stockholders' equity will decrease.

b.Stockholders' equity will increase.

c.Assets will increase.

d.Liabilities will decrease.

Answer 1

Answer

--Whenever the expense is recognised, two main changes takes place:
>Expenses balance gets increased, and
>Cash balance is Decreased (if expense is paid in cash) OR Liability balance is increased (if expense is not yet paid)

>Also, increase in expense = Decrease in Net Income = Decrease in Retained earnings = Decrease in Stockholder's Equity.

--Correct answer is, therefore, Option 'A' Stockholder's Equity will DECREASE if an expense is recognised by an entity.