Question

Explain how the following items affect equity: revenue, expenses, investments by owners, and distributions to owners.

a) Revenue increases equity; Expenses and distributions decrease equity; Investments by owners have no effect.
b) Revenue and investments by owners increase equity; Expenses and distributions decrease equity.
c) Revenue and investments by owners decrease equity; Expenses and distributions increase equity.
d) Revenue and distributions increase equity; Expenses and investments by owners decrease equity.

Answer 1

Revenue and investments by owners increase equity; Expenses and distributions decrease equity.

Step-by-step explanation:

The correct option is b) Revenue and investments by owners increase equity; Expenses and distributions decrease equity.

Revenue increases equity because it represents the income generated from the sale of goods or services. This increases the overall value of the company and its equity.

Expenses decrease equity because they represent the costs incurred in running the business. These expenses reduce the overall value of the company and its equity.

Investments by owners have the potential to increase equity if the owners contribute capital to the business. This can increase the overall value of the company and its equity.

Distributions to owners, such as dividends, decrease equity because they represent the distribution of profits to owners. This reduces the overall value of the company and its equity.