The Expanded Ledger: Revenue, Expense, and Drawings

1. Created by D. Gilroy Heart Lake Secondary School 1 The Expanded Ledger:Revenue, Expense, and Drawings Chapter 5

2. Created by D. Gilroy Heart Lake Secondary School 2 Expanding the Ledger

3. 3 Expanding the Ledger Through the first four chapters we have looked at the fundamental accounting equation �

4. 4 Types of OE Entries? Owner�s 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 owner�s withdrawals from the business for personal use.

5. 5 The focus of Chapter 5 is the specific identification and use of accounts to track � Expanding the Ledger

6. 6 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? Expanding the Ledger

7. 7 Example of Expanding the Ledger

8. 8 How much was spent on advertising? Are the wages fair? Is the rent too high? How much did the owner withdraw from the business? Example of Expanding the Ledger

9. 9 Example of Expanding the Ledger

10. 10 Some of the information from these new accounts will be used to prepare an Income Statement. What do you think an Income Statement is? Income Statement

11. 11 Sample Income Statement

12. 12 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. Revenue

13. 13 A company is paid $500 for services rendered. Before using revenue accounts: Revenue

14. 14 Revenue

15. 15 GAAP - Revenue Recognition

16. 16 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???? Expenses

17. 17 A company pays wages of $250. Before using expense accounts: Expenses

18. 18 Expenses

19. 19 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. Net Income or Net Loss

20. 20 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. Drawings

21. 21 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. Drawings

22. 22 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. Expanding the Ledger

23. 23 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 owner�s personal withdrawals. A drawings account normally has a debit balance. Drawings are NOT a factor in calculating net income or loss. Expanding the Ledger

24. 24 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 creditor�s 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 supplier�s account payable will receive a ____ entry. Class / Homework

25. 25 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. Class / Homework

26. 26 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. Class / Homework

27. 27 p. 126, Exercise 3: Use chart (see handout) to complete. p. 127, Exercise 5: Use chart (see handout) to complete. NOTE: if you don�t have the handout, you can prepare your own chart to analyze the stated transactions. Class / Homework

28. 28 Exercise 3 (page 126)

29. 29 Exercise 5 (page 127)

30. Created by D. Gilroy Heart Lake Secondary School 30 The Income Statement

31. 31 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. The Income Statement

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33. 33 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. The Income Statement

34. 34 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 owner�s income tax return. Corporations must file their own tax returns. The income statement must be sent to the government along with the tax returns. The Income Statement

35. 35 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) Fiscal Period

36. 36 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. Accounting Period

37. 37 GAAPThe Time Period Concept

38. 38 GAAPThe Matching Principle

39. 39 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 Chart of Accounts

40. 40 Expanded Basis Equation and Debit / Credit Rules

41. 41 p. 134, Exercise 1: Identify the errors. Prepare corrected income statement. Class / Homework

42. 42 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. Class / Homework

43. Created by D. Gilroy Heart Lake Secondary School 43 Equity Relationship and the Balance Sheet

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46. 46 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). Class / Homework

47. 47 Class / Homework

48. 48 Class / Homework

49. 49 Class / Homework

50. 50 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. Class / Homework

51. 51 p. 149, Comprehensive Exercise 7: Prepare all the requirements as outlined in the text. This assignment will be submitted for marks. Assignment