unit 5 – revenue and expense accounts. key concepts analyze transactions that involve asset,...

Unit 5 – Revenue and Expense Accounts

Key Concepts

• Analyze transactions that involve asset, liability, owner’s equity, revenue, and expense accounts

• Record the transactions in ledger accounts• Prepare a report form balance sheet• Prepare financial statements from a trial

balance

General Ledger

• Must contain all the accounts required to prepare both financial statements: the balance sheet and the income statement

Type of Account Use

AssetLiabilityOwner’s equity

RevenueExpense

Preparation of balance sheet

Preparation of income statement

- For each item in each type of account there is an account in the general ledger.

Review – Revenue Accounts

• Revenue – money or the promise of money received from the sale of goods and services

• Examples– Gym obtains revenue from members’ fees– A real estate firm earns commissions from selling houses– Professionals such as lawyers, accountants, and dentists

earn fees from their clients for their services

• The different types of revenue earned determine the number of revenue accounts necessary

Review Expense Accounts

• Expenses: the costs incurred to generate revenue

• A separate account is set up for each major type of expense.

• Criteria to determine whether a separate account is needed(1) – frequency of usage(2) – dollar value of expenditure

• Small expenditures that occur infrequently are normally collected in an account together. (Miscellaneous)

Review – Debit/Credit for Balance sheet Accounts

Assets = Liabilities + Owner’s Equity

Debit Credit Debit Credit Debit Credit

LHS RHS=

Revenue/Expenses & Owner’s Equity

Owner’s Equity

Debit

** Expenses decrease owner’s equity.(recorded on the debit side)

Credit

** Revenue increases owner’s equity.(recorded on credit side)

Summary – Revenue & Expense Accounts

Expense Accounts Revenue Accounts

Debit Credit Debit Credit

Expenses are recorded as debits because expenses decrease equity.

Revenue is recorded as a credit because revenue increases equity.

Why create separate accounts for each type of revenue and expense?

- To monitor which sources are contributing most to the company’s revenue, and which ones may becoming too expensive for the company.

Review – Transaction analysis

• At least two accounts are involved in recording every business transaction.

• Total debits = Total credits (for each transaction)

The following examples will involve the 5 types of accounts we have looked at: assets, liabilities, owner’s equity, revenue, and expense.

Example 1

• Mar. 1 – Received $35 from a client for cutting and styling hair.

CashMar.1 35

Fees Earned (Revenue)Mar.1 35

Example 2

• Mar. 5 – Billed P. Milne $75 for cut and style.

• Which accounts are involved?

Example 2

• Mar. 5 – Billed P. Milne $75 for cut and style.

Accounts ReceivableMar.5 75

Fees Earned (Revenue)Mar.1 35Mar. 5 75

Example 3

• Mar. 10 – Paid $200 to Bell Canada for telephone bill received today.

• Which accounts are involved?

Example 3

• Mar. 10 – Paid $200 to Bell Canada for telephone bill received today.

Telephone ExpenseMar. 10 200

CashMar.1 35 Mar. 10 200

Example 4

• Mar. 18 – Received a bill from the Barrie Advance for $545 for advertising. The terms of payment allow 30 days to pay. The bill will be paid later.

• Which accounts are involved?

Example 4

• Mar. 18 – Received a bill from the Barrie Advance for $545 for advertising. The terms of payment allow 30 days to pay. The bill will be paid later.

Accounts PayableMar. 18 545

Advertising ExpenseMar. 18 545

Example 5

• Mar. 23 – Paid $200 to the Barrie Advance as partial payment of their bill received previously.

• Which accounts are involved?

Example 5

• Mar. 23 – Paid $200 to the Barrie Advance as partial payment of their bill received previously.

Accounts PayableMar. 23 200 Mar. 18 545

CashMar.1 35 Mar. 10 200

Mar. 23 200

More examples…

• Pages 79-81 – 6 more transactions.

The Drawings Account

• Records the withdrawal of money or other assets from the business by the owner for personal use.

• This action the value of the owner’s equity. (similar to an expense transaction)

• Cannot be considered an expense, as this withdrawal does not help to produce additional revenue.

The Drawings Account Cont.

• Withdrawal of funds affects investment, the Drawings account is an equity account.

• Owner’s equity section of the general ledger

• Normally has a debit balance– Withdrawals decrease owner’s equity.

Examples – Drawings account withdrawals

• Withdrawing cash• Removing merchandise for personal use• Taking the equipment from the business for

personal use• Using company funds for personal expenses of

the owner of the owner’s family.

Examples – Drawings account withdrawals

C. Piccolo, Drawings

Debit Credit

** Withdrawals are recorded as debits because they decrease capital **

Example: On October 15, C. Piccolo, the owner, withdrew $1000 cash from the business for personal use.

C. Piccolo, Drawings

Oct 15 1 000

Cash

Oct. 15 1 000

* The payment of wages or salaries to an owner must be recorded in the Drawings account of income tax purposes. (not as an expense)

Summary – General Ledger

• See Figure 3.5 – Page 84 of your textbook

Equity Accounts on the Balance Sheet

• Income statement 1st

- the net income/loss affects the balance sheet

Owner’s capital account- record of the owner’s investment in the business.

(owner’s claim against the assets)- if there is net income earned or if the owner

increases the assets of the business.- if there is a net loss or if the owner

withdraws assets from the business for personal use

Ex: 1- Capital increases when withdrawals are less than net income:

Ex: 2 - Capital decreases when withdrawals are greater than net income:

Ex: 3 - Capital decreases when there is a loss and the owner has

withdrawn assets:

Different Forms of the Balance Sheet

Account form – lists the assets on the LHS, and the liabilities and owner’s equity on the RHS.(what we have done up to now)

Report form – lists the assets, liabilities, and owner’s equity vertically.

Assets = Liabilities + Owner’s Equity(always applies)

Report Form Balance Sheet

Example

Dollar Signs should be placed…

- Beside the first figure in each column in both sections of the statement

- Beside the final total in both sections of the statement

See Figure 3.9 – Page 87

Preparing Financial Statements from the Trial Balance

Trial Balance

Income Statement

Balance Sheet

Activity.

• In pairs, use the trial balance on page 88 to create the corresponding income statement and balance sheet. Do this, without looking at page 89.

• After you make an attempt, I will go over it with you.

Goldman’s GymIncome Statement

For the month ended October 31, 20 -

RevenueMembers’ FeesTanning Bed RentalTowel Rental

$14 600725160 $15 485

ExpensesSalariesAdvertisingTelephoneMaintenanceLicenseInterestLaundryNet Income

3 8502 880

190650

1 1001 500

90 10 260$5 225

Goldman’s GymBalance Sheet

October 31, 20 -

CashAccounts ReceivableOffice SuppliesLandBuildingTraining EquipmentTotal Assets

Assets$7 650

2 700695

225 000110 000

99 235

$245 280

LiabilitiesAccounts PayableBank LoanMortgage PayableTotal Liabilities

Owner’s EquityR. Millar, Capital October 1Add: Net Income for OctoberLess: R. Millar, DrawingsIncrease in CapitalR. Millar, Capital October 31Total Liabilities and Owner’s Equity

Liabilities and Owner’s Equity

$11 60063 00080 000

86 655$5 225 1 200

4 025

$154 600

90 680$245 280