Which statement describes expenses?

Which statement describes expenses?

• A. Decreases in assets or increases in liabilities that result in decreases in equity, other than distributions to holders of equity claims.
• B. Increases in assets.
• C. Distributions to owners.
• D. Non-cash gains.

Answer: (A)

Expenses are decreases in equity that arise from using up assets or incurring liabilities in the course of doing business, and they exclude distributions to owners. When an expense occurs, the entity’s assets fall (for example, paying cash) or its liabilities rise (accrued expenses), which reduces retained earnings. Even non-cash items like depreciation reduce assets and equity, so they count as expenses too. Distributions to owners reduce equity but are not considered expenses. An increase in assets or non-cash gains would not describe an expense, since they either boost equity or don’t reduce it.

Expenses are decreases in equity that arise from using up assets or incurring liabilities in the course of doing business, and they exclude distributions to owners. When an expense occurs, the entity’s assets fall (for example, paying cash) or its liabilities rise (accrued expenses), which reduces retained earnings. Even non-cash items like depreciation reduce assets and equity, so they count as expenses too. Distributions to owners reduce equity but are not considered expenses. An increase in assets or non-cash gains would not describe an expense, since they either boost equity or don’t reduce it.