Which statement about expenses is correct?

• A. They are recorded when cash is paid.
• B. They are the same as costs.
• C. They increase owner's equity.
• D. They result from using up assets or consuming services in generating revenues.

Answer: (D)

Expenses reflect the costs of using up assets or consuming services in the process of earning revenue. They are recognized as the resources are used, not necessarily when cash is paid, and they reduce net income, which in turn lowers owner's equity. This is why the statement about expenses being the result of using up assets or consuming services to generate revenues is correct.

In accrual accounting, costs and expenses aren’t identical: a cost is what you pay to acquire something, while an expense is the portion of that cost that is recognized as it is used to generate revenue. Also, expenses don’t always align with cash payments—cash can be paid later or earlier, due to accrual timing. For example, paying for utilities in the current month recognizes the expense for that month, even if the cash flow occurs at a different time.

So, expenses are about consuming resources to generate revenue, which is why they decrease owner's equity, and that aligns with option describing expenses as the result of using up assets or services in earning revenues.