Question

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

Short answer

Expenses differ from losses as they arise from the day-to-day activities of the business. On the other hand, losses arise from peripheral and accidental transactions.

Distributions to owners differ from the expenses and losses as it refers to the transfer made to owners; they do not result from the activities done to generate income.

Step-by-step solution

Definition of Net Assets

Net assets are the value of a company's assets obtained by subtracting the firm's liabilities from its assets. It helps in analyzing the assets of the company at a certain point in time.

Difference between expenses, losses, and distribution to owners

Expenses are the cost incurred in the process of manufacturing goods and services. It arises from the ongoing operations of the business. Examples of expenses include productive wages, freight inward, cartage, or carriage inward.

While losses are referred to as non-operating expenses, they arise from incidental transactions. Examples of losses include loss of stock due to accident, theft, or fire.

On the other hand, distribution to owners differs from the expenses and losses as distribution or sharing to owners refers to the transfer to stockholders or owners. They do not result from any activity; it is the payment of retained earnings of a firm made to its owners. Examples include payment of cash, stock, or physical product to its shareholders.