Which situation increases owner's equity?

• A. Services are provided on account.
• B. Cash purchases of inventory
• C. Owner's drawing
• D. Depreciation expense recorded

Answer: (B)

The main idea is that owner’s equity grows when the business earns revenue, since revenue increases retained earnings and the owner’s claim on the business. When services are provided on account, revenue is earned and accounts receivable increases. The resulting higher net income boosts retained earnings, which raises owner’s equity.

The other scenarios don’t increase owner’s equity: buying inventory with cash just shifts value between assets (cash down, inventory up) with no change in earnings or owner’s capital; a drawing by the owner reduces owner’s equity because it takes value out of the business; and depreciation expense lowers net income, which reduces retained earnings and thus owner’s equity.