Created by D. Gilroy

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The Expanded LedgerRevenue, Expense, and
Drawings

• Chapter 5

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Expanding the Ledger
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Expanding the Ledger

• Through the first four chapters we have looked at
  the fundamental accounting equation

Assets Liabilities Owners Equity

• This resulted in a single account for owners
  equity.
• By default, what types of entries have you
  charged to owners equity?

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Types of OE Entries?

• Owners investment in the company.
• Revenues from the sale of goods or by providing a
  service.
• Expenses related to the operation of the business
  and the generation of revenues.
• Drawings or owners withdrawals from the business
  for personal use.

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Expanding the Ledger

• The focus of Chapter 5 is the specific
  identification and use of accounts to track

REVENUES
EXPENSES
DRAWINGS
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Expanding the Ledger

• The purpose of expanding the ledger is to provide
  essential information about the progress of the
  business.
• This information is needed to assess the ongoing
  profitability of the company.
• What do we mean when we say a company is
  profitable or making a profit?
• What is meant by loss?

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Example of Expanding the Ledger
What do we know about profitability of this firm
in the month of January?
Did they make a profit or a loss?
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Example of Expanding the Ledger

• How much was spent on advertising?
• Are the wages fair?
• Is the rent too high?
• How much did the owner withdraw from the business?

What types of economic events can we speculate
impacted the owners equity account?
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Example of Expanding the Ledger
Now what can we determine about the
profitability of this firm?
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Income Statement

• Some of the information from these new accounts
  will be used to prepare an Income Statement.
• What do you think an Income Statement is?

• What accounts do you think we would use to
  prepare in Income Statement?

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Sample Income Statement
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Revenue

• What is revenue?
• Selling goods or services produces revenue.
• What impact does revenue have on equity?
• Revenue is an increase in equity resulting from
  the sale of goods or services in the usual course
  of business.

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Revenue

• A company is paid 500 for services rendered.
• Before using revenue accounts

Dr. Cash 500 Cr. Owners
Equity 500

• Using revenue accounts

Dr. Cash 500 Cr. Revenue 500
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Revenue
How do revenue accounts behave?
Normal Balance
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GAAP - Revenue Recognition
The revenue recognition convention states that
revenue must be recorded in the accounts (i.e.
recognized) at the time the transaction is
completed.

• What does this mean?
• Revenue is recorded when the bill is sent to the
  customer.
• For a cash transaction, revenue is recorded when
  the sale is complete and the cash is received.

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Expenses

• What is expenses?
• The costs associated with producing revenue.
• What impact do expenses have on equity?
• Expenses represent a decrease in equity resulting
  from the cost of producing revenue.
• Examples????

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Expenses

• A company pays wages of 250.
• Before using expense accounts

Dr. Owners Equity 250 Cr.
Cash 250

• Using expense accounts

Dr. Wages Expense 250 Cr. Cash 250
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Expenses
How do expense accounts behave?
Normal Balance
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Net Income or Net Loss

• Using the revenue and expense accounts, a
  business can determine if they have earned a net
  income (profit) or a net loss.
• Net Income is the difference between the total
  revenues and total expenses, where the revenues
  are greater than the expenses.
• A Net Loss is created if expenses are greater
  than the revenues.

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Drawings

• The owner usually looks to the profits of the
  business to provide a livelihood.
• In a healthy business, the owner is able to take
  funds (generated by profits) out of the business.
• These withdrawals of funds, by the owner, are
  known as Drawings and decrease equity.

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Drawings

• Drawings are NOT expenses.
• They are not associated with producing revenue.
• Drawings have nothing to do with the
  determination of the net income or net loss.
• Cash is the most common item withdrawn by an
  owner for personal use.

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Expanding the Ledger

• There are four types of accounts in the equity
  section
• Capital this account will now contain only the
  equity figure at the beginning of the fiscal
  period plus new capital from the owner.
• Revenues increases in equity resulting from the
  sale of goods or services. A revenue account
  normally has a credit balance.

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Expanding the Ledger

• Expenses decreases in equity resulting from the
  costs of the materials or services used to
  produce the revenue. An expense account normally
  has a debit balance.
• Drawings decreases in equity resulting from the
  owners personal withdrawals. A drawings account
  normally has a debit balance. Drawings are NOT a
  factor in calculating net income or loss.

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Class / Homework

• p. 127, Exercise 4
• Complete each statement with a DR or CR
• The Bank account normally has a ____ balance.
• A Revenue account normally has a ____ balance.
• An Expense account normally has a ____ balance.
• Paying a creditor involves a ____ entry to the
  creditors account.
• The Drawings account receives a ____ entry when
  the owner withdraws money for personal use.
• A lawyer gives a cash refund to a customer. The
  Bank account will receive a ____ entry and the
  Revenue account will receive a ____ entry.
• Supplies are bought on credit. The Supplies
  account will receive a ____ entry and the
  suppliers account payable will receive a ____
  entry.

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Class / Homework

• p. 127, Exercise 4 (continued)
• Complete each statement with a DR or CR
• The Drawings account will not normally receive
  ____ entries.
• An increase in equity can be thought of as a ____
  to the Capital account.
• Net Income can be thought of as a ____ to the
  Capital account.
• Net Loss can be thought of as a ____ to the
  Capital account.
• The owner takes a computer from the business for
  his personal (permanent) use. The Drawings
  account will receive a ____ entry.

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Class / Homework

• p. 124, Exercise 1
• For each of the 10 transactions listed, identify
  if one of the equity accounts is affected
  whether it would require a DR or CR entry.
• p. 125, Exercise 2
• For each of the 10 transactions listed, identify
  if one of the equity accounts is affected
  whether it would require a DR or CR entry.

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Class / Homework

• p. 126, Exercise 3
• Use chart (see handout) to complete.
• p. 127, Exercise 5
• Use chart (see handout) to complete.
• NOTE if you dont have the handout, you can
  prepare your own chart to analyze the stated
  transactions.

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Exercise 3 (page 126)
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Exercise 5 (page 127)
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The Income Statement
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The Income Statement

• The income statement tells the owners and the
  managers how the business is doing.
• By definition, an income statement is a financial
  statement that summarizes the items of revenue
  and expense, and shows the net income or net loss
  of a business for a given period of time.

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The Income Statement

• Who uses the Income Statement?
• Owners and Managers
• Shows if the business is making profit.
• Used for setting goals and policy.
• When compared to previous years, it provides a
  trend highlighting potential problems.
• Bankers
• Supports loan decisions.
• Past profitability is one indicator of future
  potential.

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The Income Statement

• Who uses the Income Statement?
• Income Tax Authorities
• Every business is required by law to prepare an
  income statement.
• The net income figure of a proprietorship must be
  included on the owners income tax return.
• Corporations must file their own tax returns.
• The income statement must be sent to the
  government along with the tax returns.

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Fiscal Period

• Net income is measured over a specific length of
  time, known as the fiscal period.
• The formal fiscal period is typically one year.
• The fiscal year does not have to be the calendar
  year it just has to run for 12 consecutive
  months (or in some cases, 52 consecutive weeks)

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Accounting Period

• The text indicates that the fiscal period is
  sometimes referred to as the accounting period.
• Companies prepare financial statements
  periodically in order to assess their financial
  condition and operating results. Accounting
  periods are typically one month, one quarter, or
  one year.
• If a company uses a one year accounting period
  (i.e. they only prepare financial statements at
  year end) it is referred to as their fiscal
  period or fiscal year.

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GAAPThe Time Period Concept
The time period concept provides that accounting
will take place over specific time periods known
as fiscal periods.

• What does this mean?
• Companies must use fiscal periods of equal length
  when measuring financial progress.

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GAAPThe Matching Principle
The matching principle states that each expense
item related to revenue earned must be recorded
in the same period as the revenue it helped earn.

• What does this mean?
• Expenses must be recorded in the period in which
  the revenue is recognized.
• To do this, accountants make a number of
  mathematical adjustments in the accounts at the
  end of a fiscal year. (we cover this in detail
  in Chapter 9)

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Chart of Accounts

• To help organize the expanded ledger, it is
  customary to number the accounts in the ledger.
  These numbers are used for identification and
  reference, particularly in computer systems.
• We will be using a computer system, Simply
  Accounting, later in the semester. The chart of
  accounts used by Simply Accounting is
• Assets 1000 1999
• Liabilities 2000 2999
• Capital Drawings 3000 3999
• Revenue 4000 4999
• Expenses 5000 5999

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Expanded Basis Equation and Debit / Credit Rules
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Class / Homework

• p. 134, Exercise 1
• Identify the errors.
• Prepare corrected
• income statement.

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Class / Homework

• p. 134, Exercise 2
• Prepare a trial balance.
• Prepare a chart of accounts based on the Simply
  Accounting numbering system in this lesson.
• Prepare an income statement.
• p. 135, Exercise 5
• Do all parts of this question including the
  questions about GAAP.

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Equity Relationship and the Balance Sheet
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Ending Capital 26,137 (Beg Inc)

Beginning Capital 21,878
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For this balance sheet, the ASSETS section is
placed on top of the LIABILITIES and EQUITY
sections instead of beside them. This format
is referred to as the report form of the balance
sheet.
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Class / Homework

• p. 140, Exercise 1
• Write out, in words numbers, how you solved for
  the unknown.
• p. 140, Exercise 2
• Write out, in words numbers, how you solved for
  the unknown.
• p. 140, Exercise 3
• Prepare the equity section of the balance sheet
  as per the example on slide 43 (which is also
  available on page 138).

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Class / Homework
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Class / Homework
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Class / Homework
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Class / Homework

• p. 146, Use Your Knowledge 1
• Write out, in words numbers your solution to
  parts (A) (B) and be prepared to discuss in
  class.
• p. 147, Use Your Knowledge 3
• Discover / correct the errors in the income
  statement.

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Assignment

• p. 149, Comprehensive Exercise 7
• Prepare all the requirements as outlined in the
  text.
• This assignment will be submitted for marks.