Which of the following increases owner's equity?

• A. Withdrawals
• B. Expenses
• C. Net income
• D. Loss

Answer: (C)

Net income increases owner's equity. When a business earns more than it spends, the difference is net income, which raises retained earnings—the part of owner's equity that accumulates from profits. In other words, positive net income adds to what the owner actually owns in the business. If there were a loss, net income would be negative and would reduce owner's equity. Withdrawals, on the other hand, are distributions to the owner and decrease owner's equity. Expenses reduce net income, which in turn lowers owner's equity. So, the factor that increases owner's equity is net income.