The Expanded Ledger: Revenue, Expenses, and Drawings Personal Tax Returns – T1

1. 5 The Expanded Ledger: Revenue, Expenses, and DrawingsPersonal Tax Returns – T1 1

2. 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 • How much money was withdrawn from the business for personal expenses?

3. PowerPoint 5–1 Chapter 5 Figure 5.3: Expanded Equity Section on Trial Balance 3

4. PowerPoint 5–2 Chapter 5 Figure 5.4: Expanded Equity Section on Income Statement 4

5. “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

6. 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

7. Revenue accounts (Fees Earned): • Most entries to revenue accounts are credits. • Why? • What would be a reason to debit your revenue account?

8. 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).

9. 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

10. 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

11. 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

12. 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

13. PowerPoint 5–3 Chapter 5 The Equity Equation 13

14. PowerPoint 5–4 Chapter 5 Eva Boa’s Balance Sheet in 14