Accountancy Readiness Test 1 Practice

Which statement best describes an Expense?

An inflow of resources.

A non-cash gain that increases equity.

A decrease in assets due to cost of sales.

The decrease in economic benefits due to outflows or asset decreases that lowers equity.

An expense is the consumption or use of resources in the process of earning revenue, and it reduces a company’s equity. It can show up as cash outflows (like paying wages or rent) or as non-cash items (like depreciation). Because expenses consume resources, they lower net income, which in turn reduces retained earnings, a part of equity, for the period.

That’s why the best description is a decrease in economic benefits due to outflows or asset decreases that lowers equity. Inflows are not expenses, and a non-cash gain would increase equity rather than decrease it. The statement about cost of sales describes a common type of expense but is too narrow; expenses encompass many kinds of resource use beyond just cost of sales.