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Dive into the details of revenue, expenses, and personal tax returns as illustrated in the textbook. Explore accounting principles such as revenue recognition and matching principle. Analyze transactions affecting equity using the chart of accounts and infographics.
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5 The Expanded Ledger: Revenue, Expenses, and DrawingsPersonal Tax Returns – T1 1
Take a look at figure 5.1 on page 132 on your textbook. • Take a minute to discuss the following questions with your partner: • How much money did the firm make in its first month? • How much was spent on advertising? • Are the wages fair? • Is the rent too high? • How much money was withdrawn from the business for personal expenses?
PowerPoint 5–1 Chapter 5 Figure 5.3: Expanded Equity Section on Trial Balance 3
PowerPoint 5–2 Chapter 5 Figure 5.4: Expanded Equity Section on Income Statement 4
“All Lions Can Draw Red Elelphants” • The Chart of Accounts = a numbering system used to identify individual accounts of the ledger • Assets 100s • Liabilities 200s • Equity • Capital 300s • Drawings 400s • Revenue 500s • Expenses 600s
Transactions affecting revenues, expenses and drawings • Example: Eva Boa draws up a legal agreement for her client and is paid $450 cash for her service. • In chapter 4 this transaction would have been: • Bank: Debit $450 • Credit $450 • Now we know that an increase in equity from business operations is • revenue: • Bank: Debit $450 • Credit $450 revenue account
Revenue accounts (Fees Earned): • Most entries to revenue accounts are credits. • Why? • What would be a reason to debit your revenue account?
The Revenue Recognition Principle: • The revenue recognition principle requires revenue to be recorded in the accounts at the time the transaction is completed. • Make a credit entry to your revenue account and debit either your bank (cash sale) or accounts receivable account (client pays later).
Expense accounts: • Example: Eva Boa writes a $3300 cheque for her monthly rent • payment. • In chapter 4 this transaction would have been: • Bank: Credit $3300 • Debit $3300 • Now we know that an decrease in equity from business operations is • An expense: • Bank: Credit $3300 • Debit $3300 expense account
The Matching Principle: • The matching principle states that each expense item related to • revenue earned must be recorded • This principle is tricky even for • accountants: • New guide from Thomson Reuters
Drawings account: • Example: Eva Boa withdraws $1975 for her personal use. • In chapter 4 this transaction would have been: • Bank: Credit $1975 • Debit $1975 • Drawings cannot be linked to revenue-making activities. Therefore it is not an expense. We debit a separate account: • Bank: Credit $1975 • Debit $1975 drawings account
In-class assignment: • Create an infographic summarizing the following accounting principles • and definitions learned in chapter 5: • The Fiscal Period (check page 148) • The Time Period Concept (check page 148) • The Matching Principle • The Revenue Recognition Principle • The Prudence Principle (research online!) This Photo by Unknown Author is licensed under CC BY-SA
PowerPoint 5–3 Chapter 5 The Equity Equation 13
PowerPoint 5–4 Chapter 5 Eva Boa’s Balance Sheet in 14
