Principal Account Clerk Civil Service Practice Test 2025 – All-in-One Guide to Exam Success!

In accounting, when an expense is recognized, it directly impacts the income statement by decreasing the overall income of the organization. Income represents the revenues earned by a business, and when expenses are recorded, they are subtracted from revenues to calculate net income. Thus, an increase in expenses leads to a reduction in income, reflecting the true profitability of the company during a specific period.

The relationship can be illustrated in the fundamental accounting equation: Assets = Liabilities + Equity. While expenses affect net income, they eventually influence equity since net income contributes to retained earnings within the equity section. However, it is important to note that expenses do not directly decrease asset or liability accounts but rather impact income, which in turn affects equity indirectly. This makes recognizing the correct answer – that an expense decreases income – crucial for understanding how expenses flow through the financial statements.