2/ impact in the equity of revenue and expenses

Expert Solution

Note: As the question is not very specific and clear in terms of requirement. So, as per my understanding the question is asking about how does revenue and expense impacts the equity of the company??

Impact of revenue & expenses on equity:

When a company records a revenue, it increases its current assets (cash/bank balance/ trade receivables) with corresponding increase in equity. 1st of all sales is credited and current asset is debited. The sales a/c is transferred to Profit and loss a/c at the year-end as a credit line item and then its balance is moved as an addition to retained earnings, which is an equity component.
When a company records an expense, it increases its current liability (trade payables) or reduces cash/bank balance with ultimate reduction in equity. 1st of all expense A/c is debited and current asset/current liability A/c is credited. The expense a/c is transferred to Profit and loss a/c at the year-end as a debit line item and then its balance is moved as a reduction in retained earnings, which is a component of equity.

ekkarill92 answered 3 years ago

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