Which situation describes a company experiencing an accounting loss according to the BASE formula?

• A. The company issues new shares, increasing the equity balance.
• B. The ending balance of retained earnings is higher than the beginning balance due to revenues exceeding expenses.
• C. The company pays dividends, reducing the retained earnings balance.
• D. The ending balance of retained earnings is lower than the beginning balance due to expenses exceeding revenues.

Answer: (D)

Verified step by step guidance

1. Understand the BASE formula, which stands for Beginning balance + Additions - Subtractions = Ending balance. This formula is used to calculate changes in accounts such as retained earnings.
2. Recognize that retained earnings are affected by revenues, expenses, and dividends. Revenues increase retained earnings, expenses decrease retained earnings, and dividends also reduce retained earnings.
3. Identify the situation described in the problem: an accounting loss occurs when expenses exceed revenues, leading to a decrease in retained earnings.
4. Apply the BASE formula to the retained earnings account: if the ending balance of retained earnings is lower than the beginning balance, it indicates that expenses have exceeded revenues during the period.
5. Conclude that the correct situation describing an accounting loss is when the ending balance of retained earnings is lower than the beginning balance due to expenses exceeding revenues.