Question

What types of transactions reduce owner’s equity? What types of transactions reduce retained earnings? What do they have in common?

a) Both reduce with dividends; Commonality: Cash outflow
b) Both reduce with expenses; Commonality: Cash outflow
c) Owner's equity reduced by withdrawals; Retained earnings reduced by dividends; Commonality: Cash outflow
d) Owner's equity reduced by investments; Retained earnings reduced by losses; Commonality: Cash outflow

Answer 1

Owner's equity is reduced by withdrawals and retained earnings are reduced by dividends. Both transactions have the commonality of cash outflow.

Step-by-step explanation:

The correct answer is c) Owner's equity reduced by withdrawals; Retained earnings reduced by dividends; Commonality: Cash outflow. Withdrawals reduce the owner's equity because they represent the owner taking funds out of the business for personal use. Dividends reduce retained earnings because they represent a distribution of profits to the shareholders of a corporation. Both transactions have a commonality of cash outflow, meaning that cash is being spent or taken out of the business.