The outflow of resources used to operate a business that reduces net income.

• A. Assets
• B. Expenses
• C. Revenue
• D. Equity

Answer: (B)

The key idea is that expenses are the costs used up to run the business. When you pay for things like rent, salaries, or utilities, you’re using up resources, and those costs show up on the income statement as deductions from revenue, which lowers the net income. In other words, expenses represent the ongoing consumption of assets or the incurrence of liabilities to operate, and that consumption reduces the profitability of the company.

Assets are the resources the business owns, not the costs that reduce profitability. Revenue is the money earned from selling goods or services, which increases net income. Equity reflects the owners’ claim on the business and is affected by profits, but it isn’t the ongoing outflow used to operate. So, the concept that best describes the described outflow and its effect on net income is the notion of expenses. For example, paying rent reduces cash (an asset) and records as an expense, which then lowers net income.