Explain the effect that income and expenses have on the owners equity
Income and expenses directly affect the owner's equity of a business.
Income increases the owner's equity by increasing the assets of the business. When a business generates revenue, it adds to the assets of the business, which in turn increases the owner's equity. This is because income increases the overall value of the business and its ability to generate future profits.
On the other hand, expenses decrease the owner's equity by decreasing the assets of the business. Expenses are costs incurred by the business in order to generate income. When expenses are subtracted from income, this reduces the overall value of the business and therefore, decreases the owner's equity.
The difference between the income and expenses of a business is referred to as the net income or net loss. Net income increases the owner's equity, while net loss decreases it. In summary, income and expenses play a crucial role in determining the financial health and value of a business, and ultimately affect the owner's equity.