How does the recognition of an expense impact financial statements?

Recognizing an expense has a direct impact on financial statements, particularly in how it affects net income and equity. When an expense is recognized, it is recorded on the income statement, which results in a decrease in net income for that period. This reduction in net income directly impacts retained earnings, a component of equity on the balance sheet, leading to a decrease in total equity.

This relationship is fundamental to the matching principle in accounting, which dictates that expenses should be recorded in the same period as the revenues they helped generate. Therefore, when expenses are incurred, they reduce the profitability shown on the income statement. Following this, since net income contributes to retained earnings, which is part of shareholders' equity, any reduction in net income translates to a decrease in equity on the balance sheet.

Overall, Option C accurately captures the dual effect of recognizing expenses—lowering both net income in the income statement and total equity in the balance sheet. This understanding is crucial in accounting, as it helps stakeholders assess the financial position and performance of a business accurately.