Every action that a company engages in impacts the company's financial position. When a business pays an expense, it records the financial transaction using at least two accounts. These accounts typically include assets and an expenses or liabilities account. When a company pays an expense, it ultimately impacts the stockholders' equity of the business. Both asset and stockholders' equity accounts appear on the balance sheet.
Companies incur expenses regularly in the course of business. These expenses include employee wages, supplies or insurance expense. The company often records the expense prior to paying it. For example, the company receives supplies and incurs the expense on one day, but it may pay for the supplies 10 days later. The company records the expense on the day it receives the supplies and records the payment when it prints the check at the later date.
When a company pays an expense, it uses cash. The company maintains a sufficient cash level to pay its financial obligations, including expenses. Cash represents a current asset owned by the company. Each time the company makes a payment, its cash level decreases. This reduces the company's asset level.
Retained earnings represent a stockholder's equity account. Retained earnings increase as the company records a profit. Retained earnings decrease as the company records a loss or a dividend payment. All expenses recorded by the company reduce the profit recorded in the financial records. The company transfers the profit to the retained earnings account at the end of the reporting period. As expenses increase, the profits decrease and the retained earnings experiences a lower increase.
A change in the asset section of the balance sheet requires an equal change in the liabilities or stockholders' equity section of the balance sheet. The expense payment impacts the balance sheet in two sections. These include the assets and the equity section. The assets section consists of three subsections. These subsections include current assets, fixed assets and other assets. As the company makes payments for its expenses, the current assets and total assets decrease. As the company records the impact of its expenses, the profits decrease, the retained earnings decrease and total stockholders' equity decreases.
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