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