Home › ACCA › Financial Accounting › The Accounting Equation › How do revenue and expense accounts relate to th…
How do revenue and expense accounts relate to the accounting equation?
AThey do not affect the equation at all
BThey affect equity through Retained Earnings
CThey are listed as liabilities
DThey reduce total assets directly
Answer & Solution
Correct answer: B. They affect equity through Retained Earnings
1. Revenue and expense accounts do not appear directly in the accounting equation.
2. Indirectly, they affect equity by changing the Retained Earnings balance when closed.
3. Closing revenue credit balances increases Retained Earnings; closing expense debit balances decreases it.
4. They are not liabilities (C) and do not directly cut assets (D); they clearly do affect the equation, ruling out A.
5. Therefore they affect equity through Retained Earnings.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.7.1 "Accounting Equation Broken Out", p.43_
Related questions
In what order are the three period-end financial statements prepared?Which account is NOT listed at all on the statement of financial position?A statement of financial position shows total assets of $60,000 and liabilities of $5,000.The retained earnings statement is often described as a "bridge" between which two financiBeginning Retained Earnings is $30,000. Net income for the month is $13,000 and dividends In an accounting transaction grid, a business ends with Cash $1,500, Accounts Receivable $A truck costing $30,000 is bought with a $10,000 down payment and a $20,000 loan. How doesWhat is the accounting equation?