Which statement is true regarding "expenses" according to GAAP?

• A. Expenses reduce net income
• B. Expenses are recorded only when cash is paid
• C. All expenses are considered long-term
• D. Expenses are irrelevant to financial analysis

Answer: (A)

The statement that expenses reduce net income is true according to GAAP. Under Generally Accepted Accounting Principles, expenses are recognized in the accounting period in which they are incurred, regardless of when the cash payment is made. This aligns with the accrual basis of accounting, where expenses are matched against revenues to provide a true picture of a company's profitability.

When expenses are recorded, they are subtracted from total revenues for that period, leading to a decrease in net income. This reduction in net income is a fundamental concept in financial reporting, as it helps stakeholders understand a company's financial performance over time. Recognizing expenses accurately is crucial for presenting a realistic financial position to investors, creditors, and other users of financial statements.

This understanding reinforces the importance of expenses in accounting, highlighting their direct impact on net income and overall financial health.