The owner’s equity increases due to revenue. Which statement best describes this effect?

The owner’s equity increases due to revenue. Which statement best describes this effect?

• A. Owner's equity increases only with profits kept
• B. Owner's equity increases with any revenue
• C. Owner's equity decreases with revenue
• D. Owner's equity is not affected by sales

Answer: (B)

Revenue earned increases owner’s equity because it boosts net income, and that net income increases retained earnings, a part of the equity section. When revenue is recorded, assets rise (cash or accounts receivable) and equity rises as well, since the earned revenue adds to the owners’ claim on the business. At period end, the effect on equity equals net income (revenue minus expenses); if expenses erase the revenue, the net impact on equity may be smaller or even negative, and withdrawals can reduce equity. In short, revenue tends to lift owner’s equity because it increases the earnings that are kept in the business.

Revenue earned increases owner’s equity because it boosts net income, and that net income increases retained earnings, a part of the equity section. When revenue is recorded, assets rise (cash or accounts receivable) and equity rises as well, since the earned revenue adds to the owners’ claim on the business. At period end, the effect on equity equals net income (revenue minus expenses); if expenses erase the revenue, the net impact on equity may be smaller or even negative, and withdrawals can reduce equity. In short, revenue tends to lift owner’s equity because it increases the earnings that are kept in the business.