Chapter 5 NotesChapter 5 Notes

The Expanded LedgerRevenue, Expenses & Drawings

Stephen and Motashim must see me!

To date you have been accustomed to having a single account for owner’s equity

Any change in the equity of the business was recorded in that one account, no matter what caused the change – this is not the case any more!

In reality, there are minimum 3 or 4 accounts under Owners Equity subheading.

Expanding the LedgerExpanding the Ledger

In theory, there should be minimum 3 or 4 accounts under Owners Equity subheading. 1.Revenues – related to the sale

(=selling) of goods or services2.Expenses – costs related to

revenues (what the business had to pay to make the product or to provide the service)

Expanding the LedgerExpanding the Ledger

1.Expenses – costs related to revenues (what the business had to pay to make the product or service)

• When business incurs expenses, it is bad for the business, so you should debit (or reduce) owner’s equity.

• When you increase expense account, it is bad for the business, so you debit expense account.

Expanding the LedgerExpanding the Ledger

1.Expenses • For example, if a Bestbuy owner

bought flyer paper (for Bestbuy) from Staples, (in order to use the flyers for Black Friday sale brochure in November) then this entry is an expense for Bestbuy.

• For Bestbuy, this transaction is: debit to Advertising expense account by $50 and credit to Bank account by $50

Expanding the LedgerExpanding the Ledger

3. Drawings – owner’s withdrawals for personal useMr. Park owner of “Park Accounting”

withdraws $500 to buy coach purse for his wife:

We will debit Drawings account and credit Bank account by $500.

Expanding the OE (4 accounts)Expanding the OE (4 accounts)

3. Drawings • Since it is impossible to show every

sub-accounts under “Revenue” and under “Expense”, accountants use Income Statement to show all the sub-accounts, which are under “Revenue” and “Expenses”. • Remember, if a boy or a girl asks you,

“may I marry you?” you should ask, “can I see your income statement” instead of saying, “how much do you make a year?”

Expanding the OE (4 accounts)Expanding the OE (4 accounts)

To provide essential information about the progress of the business

Helps managers run the business and determine profitability

Some of the new accounts will be used to make an income statement which shows whether the business is profitable or not

Purpose – Why Expand?Purpose – Why Expand?

Selling goods or services produces revenue

Revenue is an increase in equity resulting from the sale of goods or services in the usual course of business• Ie: Mike Tran, a barbor gives

haircut for his client Park, and Park paid cash of $20, then this is a revenue for Mike.

RevenueRevenue

• If a reliable customer (owner of Boston Pizza, which is next door) buys a laptop from futureshop and promises that he will pay back 30 days later. Is this a revenue? He signed sales invoice. Debit AR and Credit Inventory

• If a stranger customer walks into futureshop and promises that he will pay back 30 days later. My store worker (who has worked only two weeks) let the customer take the laptop home. Is this a revenue for futureshop? (Discuss !) This one is an open ended question. Not Revenue because there is not a reasonable assurance of collecting the money.

RevenueRevenue

Revenue for service business is called Fees Earned (revenue) avccount.• Revenue represents an increase in equity• An increase in equity requires a credit

entry• Therefore, Fees Earned (revenue) account is

credited just like the revenue account, when the business makes sales.

*** Thus, all similar transactions affecting revenue (or fees earned) will be credited to the Fees Earned account. This account will have a credit balance

RevenueRevenue

Expenses are costs associated with producing revenue

Examples are Rent payment, wages, utilities (hydro), advertising, etc

An Expense represents a decrease in equity resulting from the costs of producing the revenue

To decrease equity account, you have to debit it.

Therefore, expense account normally has a debit balance.

ExpensesExpenses

To increase expense account, you will make a debit entry.

To decrease expense account, you will make a credit entry.

ExpensesExpenses

Ie: Tristan pays his employee barber the regularly weekly wage of $400.00 in cash• Both bank and equity decreases by 400. • This decrease to equity is REALLY an

expense. • It must be debited to an expense

account. • In this case, Wages Expense account is

debited and bank account is credited. • Show the T account transactions in the

space below this line.

ExpensesExpenses

Classwork / Homework for today isP140 Review #1 - #3P150 Ex 1 and Ex 4

ExpensesExpenses