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# The Expanded Ledger: Revenue, Expense, and Drawings - PowerPoint PPT Presentation

The Expanded Ledger: Revenue, Expense, and Drawings. Unit 2-Chapter 5. Expanding the Ledger. Expanding the Ledger. In a group of 2 or 3, flip back to the transactions that we have done in class/individually: - Equation Analysis Sheet (pg 59, ex 1)

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Unit 2-Chapter 5

### Expanding the Ledger

• In a group of 2 or 3, flip back to the transactions that we have done in class/individually:

- Equation Analysis Sheet (pg 59, ex 1)

- Equation Analysis Sheet (pg 61, ex 3)

- Transactions on pg 83-89 of text book

-Transaction Analysis Sheet (pg 91, ex 3)

• Make a list on a (sheet of paper) of the transactions that only affected OE.

3. What commonality do you notice among the transactions that are affecting OE? What is happening within the transactions that affect OE?

Revenue:money that comes in from the sale of

goods or services- increase in equity

Expenses: money that goes out which is related

to the operation of the business and

the generation of revenues-decrease in

equity

Drawings: owner’s withdrawals from the business

for personal use.

• In your group of three each group member will read about one of the new OE accounts that we just looked at.

• Once you have read about one of the three new accounts you will complete the handout given to you.

• After you have pulled the important details about your account and have come to a conclusion regarding the account share your findings with your group members.

Assets

=

+

Owner’s Equity

Normal Balance

Normal Balance

Normal Balance

Revenue

Debit Credit

(DR) (CR)

• Revenue represents an increase in equity.

• An increase in equity requires a credit entry.

• Therefore, tobook revenue, credit the revenue account.

Is the “Normal Balance” of a Revenue a DR or CR?

Does Revenue typically

increase or decrease Owner’s Equity?

Debit Credit

Debit Credit

Debit Credit

(DR) (CR)

(DR) (CR)

(DR) (CR)

Revenue

How do revenue accounts “behave”?

Normal Balance

Revenue

A company is paid \$500 for services rendered.

Dr. Cash \$500

Cr. Revenue \$500

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.

Assets

=

+

Owner’s Equity

Normal Balance

Normal Balance

Normal Balance

Expenses

Debit Credit

(DR) (CR)

• Expenses represent a decrease in equity.

• A decrease in equity requires a debit entry.

• Therefore, expense accounts are typically debited.

Is the “Normal Balance” of an Expense a DR or CR?

Do Expenses typically

increase or decrease Owner’s Equity?

Debit Credit

Debit Credit

Debit Credit

(DR) (CR)

(DR) (CR)

(DR) (CR)

Expenses

How do expense accounts “behave”?

Normal Balance

Example…Expenses

A company pays wages of \$250.

Dr. Wages Expense \$250

Cr. Cash \$250

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.

Assets

=

+

Owner’s Equity

Normal Balance

Normal Balance

Normal Balance

Drawings

Debit Credit

(DR) (CR)

Do Drawings typically

increase or decrease Owner’s Equity?

Is the “Normal Balance” Drawings DR or CR?

Debit Credit

Debit Credit

Debit Credit

• Drawings represent a decrease in equity.

• A decrease in equity requires a debit entry.

• Therefore, drawing accounts are typically debited.

(DR) (CR)

(DR) (CR)

(DR) (CR)

Drawings

How do drawings accounts “behave”?

Normal Balance

Example…Drawings

The owner withdraws \$300 for their personal use.

Dr. Drawings \$300

Cr. Cash \$300

• 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.

• 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 do we know about profitability of this firm in the month of January?

Did they make a profit or a loss?

\$26,137

Example of Expanding the Ledger

Now … what can we determine about the profitability of this firm?

&

EXPENSES

An Income Statement

shows, in detail, whether the business is profitable or not … it shows if the company made a

profit or loss.

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?

What does this show?

Sample Income Statement

SUMMARY:

• 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.

• 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.

+

Liabilities

Assets

Owner’s Equity

Owner’s Drawings

Assets

Owner’s Capital

Liabilities

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Revenues

Expenses

Dr.

Cr.

Dr.

Cr.

Expanded Basis Equation and Debit / Credit Rules

• Pg 124, 1: create an account ledger using the transactions for Spalding Consultants

……15 min to do this!

### The Income Statement

• The income statement tells the owners and the managers how the business is doing.

• income statement : is a financial statement that summarizes revenue and expense and it shows the net income or net loss of a business for a given period of time.

Date?

The accounting period for which the figures have been accumulated

A company can have more than one source of revenue.

Net Income is not cash. It is the difference between total revenues and total expenses.

• 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.

• 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.

p. 134, Exercise 2:

• Prepare an income statement.

…15 min

### Equity Relationship and the Balance Sheet

Capital

\$21,878

Drawings

\$3,950

Total

Income

\$23,660

Increase

in Equity

\$4,259

(NI – Drawings)

Net

Income

\$8,209

(Rev – Exp)

Total

Expenses

\$15,451

Net

Income

\$8,209

Net

Loss

\$n/a

Ending

Capital

\$26,137

Drawings

\$3,950

+

-

-

-

-

=

Ending

Capital

\$26,137

(Beg + Inc)

Beginning

Capital

\$21,878

The equity section clearly describes what happened during the month of January. Eve Boa started the month with a \$21,878 claim on the assets. Since the Net Income was greater than her drawings by \$4,259, her claim on the assets increased to \$26,137.

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.

Practice-Calculating Equity the month of January. Eve Boa started the month with a \$21,878 claim on the assets. Since the Net Income was greater than her drawings by \$4,259, her claim on the assets increased to \$26,137.

p. 140, Exercise 1 and 3

1. in groups of four!

3. See Excel example