Consuming goods and services in the process of generating revenues results in which of the following?

• A. An asset
• B. A liability
• C. An expense
• D. Revenue

Answer: (C)

Consuming goods and services to generate revenues uses up resources, and in accrual accounting that use-up is recorded as an expense. Expenses are the costs incurred to earn revenues in the period; they reduce equity. Recognizing expenses reflects the matching principle—the costs tied to producing revenue in the period are recognized when the resources are used, even if cash flows occur later. Examples include cost of goods sold, wages, utilities, and depreciation. This behavior is not an asset or a liability, and it is not revenue.