Question

Because expenses reduce retained earnings, a ______ to expense is essentially a(n) ______ to retained earnings.

a) Credit, debit
b) Debit, credit
c) Debit, debit
d) Credit, credit

Answer 1

A debit to expense reduces net income, which consequently reduces retained earnings, therefore a debit to expense is essentially a debit to retained earnings. The correct answer is c) Debit, debit.

Step-by-step explanation:

Expenses reduce retained earnings through a debit to the expense account. When an expense occurs, it reduces net income for the period, which in turn reduces the retained earnings as net income is closed into retained earnings at the end of the period. So, the relation between expenses and retained earnings is such that a debit to expense is essentially a debit to retained earnings. This means that the correct answer is c) Debit, debit.