Chapter 5: Revenue, Expense and Drawings

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Chapter 5 Revenue, Expense and Drawings

• The Expanded Ledger

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Expanding the Ledger

• Any change in the equity of the business was
  recorded in CAPITAL account, no matter what
  caused the change
• There are 3 new accounts that affect owners
  equity.
• Revenue
• Expense
• Drawings

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Expanding the Ledger (cont)

• Revenues sale of all goods
• Expenses costs related to the revenues
• Drawings owners withdrawals for personal use

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Purpose of Expanding the System

• These accounts provide essential information
  about the progress of the company

• Income Statement is prepared with the new
  accounts (Revenues and Expenses)
• Shows the profitability of the company

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Purpose of Expanding (cont)

• Revenue increases the equity of the company
• E.g.. Sales, Fees Earned, Revenue, Commissions,
  etc.

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Expanding the Ledger

• Expenses costs associated with producing revenue
  (always decrease equity)
• E.g.. Wages Expense, Donations Expense Etc.

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Net Income / Loss

• Revenue Expenses Net Income or Net Loss
• Net Income Revenues gt Expenses
• Net Loss Revenues lt Expenses

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GAAP Principles

• Revenue Recognition principle states that
  revenue must be recorded in accounts at the time
  transaction is complete

• Matching Principle
• Each expense item related to revenue earned must
  be recorded in the same time period as the
  revenue it helped earn

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Drawings

• The owner looks to the profits of the business to
  provide a livelihood, the owner will be able to
  take funds out of the business on a regular
  basis, these withdrawals are a decrease in equity
• Account used to record withdrawals of the owner
  is Drawings

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Equity Section Summary
CR Capital Equity figure at begin of fiscal period
CR Revenues Sale of goods or services
DR Expenses Costs of materials or services
DR Drawings Owners loss/ withdrawals