Question

The business pays $2,000 in cash to the landlord for office space rent. a) Expenses reduce by $2,000 b) Equity remains unchanged c) Equity reduces by $2,000 d) Assets increase by $2,000 e) Liabilities reduce by $2,000

Answer 1

Answer: c) Equity reduces by $2,000

Step-by-step explanation:

Expenses have the effect of reducing the income that the company would have made. That income is classified under equity as retained earnings so when expenses like office rent reduce the income, they are reducing the company's equity as well.

This is why expenses are debited when they increase because they reduce the equity accounts which are credited when they increase.