BAF3M Accounting. Chapter 5 The Expanded Ledger: Revenue, Expenses, Drawings

Transcription

1 BAF3M Accounting Chapter 5 The Expanded Ledger: Revenue, Expenses, Drawings

2 5.1 Expanding the Ledger To date, we ve only used one single account for owner s equity The expanded owner s equity section includes Revenues: from sales of goods/services Expenses: costs related to revenues Drawings: owner s withdrawals for personal use

3 5.1 Expanding the Ledger Revenues: Increase Equity Expenses: Decrease Equity Drawings: Decrease Equity

4 5.1 Expanding the Ledger Why are we expanding O.E.? the one main purpose is to provide essential information about the progress of the business What kind of things can we learn about our business from these accounts??? How much money we earned this month How much we spent on advertising Are we paying too much in rent? How much money have I removed from the company in drawings

5 REVENUE Consider the following 250 CASH A lawyer draws up a legal agreement and is paid a fee of $250 cash - fees earned is another name for revenue FEES EARNED 250 Increase in equity

6 REVENUE CONTD. GAAP The Revenue Recognition Convention The revenue must be recorded in the accounts recognized at the time the transaction is completed Basically this means recording the revenue when the bill is sent to the customer, not necessarily when the cash is received

7 EXPENSE Consider the following: A lawyer pays her secretary the regular weekly wage of $400 cash Think along the following lines 1) Expense represents a decrease in equity 2) A decrease in equity requires a debit entry 3) Therefore the WAGES EXPENSE account is debited 400 CASH 400 WAGES EXPENSE Decrease in equity

8 NET INCOME & NET LOSS Net Income the difference between total revenue and total expenses when total revenue is greater then total expenses Net Loss - the difference between total revenue and total expenses when total expenses is greater then total revenue Net Income means your company has made a profit while a Net Loss means your company is losing money

9 DRAWINGS Consider the following: The owner of a business withdraws $300 cash from the business for her own personal use - drawings don t always have to be cash - an owner can take furniture, cars, etc (any asset) for their own personal use 300 CASH 300 DRAWINGS Decrease in equity Drawings have no effect on Net Income

10 5.1 Expanding the Ledger Equity Section Summary Capital: will now contain only the equity figure at the beginning of the fiscal period, plus any new investments by the owner Revenues: increases in equity, CREDIT Balance Expenses: decreases in equity, DEBIT Balance Drawings: decreases in equity, DEBIT Balance

11 5.1 Expanding the Ledger

12 Inner Circle Internet Solutions 1 2: Revenue Income Statement 2 section For the shows Month Ended September 30, 20-- Revenues the increase in 1: Heading Dial Up Service Fees Earned equity resulting gives name of $ 7, Domain Hosting Fees Earned from selling business, 3, goods/services 1, name of Web Design Fees Earned statement, Total Revenue accounting 3 $ 12, Expenses 3: Three types of period being Insurance Expense revenue (or covered 4 $ Office Rent revenue streams 1, Cable Expense are in this example 2, Phone Expense Hydro Expense 5: Expenses Wages Expense 5 are shown in 2, Supplies Expense detail 6: the Net Interest Expense Income or Total Expenses Net Loss 7, : Expense section figure shows the decrease in Income if R $ 4, Net Income equity from the costs > E; Loss if incurred while offering R < E goods/services 6

13 5.2 The Income Statement Chart of Accounts Types of accounts are assigned special numbers Assets: Liabilities OE Capital Drawings Revenues Expenses

14 5.2 The Income Statement Debit and Credit in the Expanded Ledger TYPE OF ACCOUNT TO INCREASE TO DECREASE Assets Liabilities Capital Equity Revenue Expense Drawings Debit Credit Credit Credit Debit Debit Credit Debit Debit Debit Credit Credit

15 5.2 The Income Statement Quick Review Debit Balance Accounts Assets Expenses Drawings Credit Balance Accounts Liabilities Capital Revenue Remember: DEBIT = LEFT SIDE CREDIT = RIGHT SIDE

16 5.3 Equity Relationships and the Balance Sheet Beginning Capital + Net Income Net Loss Drawings - - = Ending Capital

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