What effect do revenues have on accounts?

What effect do revenues have on accounts?

• A. Increasing expenses
• B. Decreasing liabilities
• C. Decreasing owner's equity
• D. Increasing owner's equity

Answer: (D)

Revenues have a direct impact on owner's equity by increasing it. When a business generates revenue, it typically recognizes this income on its financial statements, which leads to an increase in retained earnings, a component of owner's equity. This reflects the growth in the company’s value attributable to its operations. The recognition of revenue contributes positively to the overall financial health of the business, making it an essential aspect of financial accounting. The other choices do not accurately reflect the relationship that revenues have with accounts. Expenses are affected by revenue in that increased revenues can allow for more expenses, but they aren't directly increased by revenue. Liabilities are obligations that a company owes, and while revenue can help in managing these obligations by providing the cash flow needed for payments, it does not inherently decrease liabilities. Lastly, decreasing owner's equity would suggest a loss or expense exceeding revenue, which contradicts the basic principle that revenues increase owner's equity.

Revenues have a direct impact on owner's equity by increasing it. When a business generates revenue, it typically recognizes this income on its financial statements, which leads to an increase in retained earnings, a component of owner's equity. This reflects the growth in the company’s value attributable to its operations. The recognition of revenue contributes positively to the overall financial health of the business, making it an essential aspect of financial accounting.

The other choices do not accurately reflect the relationship that revenues have with accounts. Expenses are affected by revenue in that increased revenues can allow for more expenses, but they aren't directly increased by revenue. Liabilities are obligations that a company owes, and while revenue can help in managing these obligations by providing the cash flow needed for payments, it does not inherently decrease liabilities. Lastly, decreasing owner's equity would suggest a loss or expense exceeding revenue, which contradicts the basic principle that revenues increase owner's equity.