1. BAF3M1 The Expanded Ledger: Revenue, Expenses, and Drawings
Chapter 5, Section 5.1

2. Expanding the Ledger
To date, any change in the equity of the business was recorded in that one account
Now, you must become familiar with a system in which the ledger has a number of accounts in an equity section
Each of the new accounts reflects a particular kind of transaction that affects owner’s equity

3. Recall: Four transactions that affect equity:
Owner invests cash into the business
Increases Cash, Decreases Equity
Owner withdraws cash from the business
Decreases Cash, Decreases Equity
Firm makes a sale on goods or services
Increases Cash or A/R, Increases Equity
Firm pays for expenses (i.e. Rent, utilities, wages, hydro)

4. The Expanded Ledger- New Accounts
______________________: related to the sale of goods or services; increase in equity
______________________: the costs related to the revenues; decrease in equity
______________________: the owner’s withdrawals for personal use; decrease in equity

5. The Expanded Ledger- New Accounts cont’d
THEN
NOW
Accounts Used
Owner invests cash in business
Cash
(increase)
Equity
Owner withdraws cash from business
(decrease)
Drawings
(decreases Equity)
Firm makes sale of goods/services
Cash or A/R
Revenue
(increases Equity)
Firm pays for expenses
(decreases)
Expenses

6. Purpose of Expanding the Ledger
To provide essential information about the progress of the business (profitability, decision-making)
J. Smith’s Questions:
How much money did the firm make this month?
How much was spent on advertising?
Are the wages fair?
Is the rent too high?
How much money did I withdraw from the business for personal expenses?

7. Purpose of Expanding the Ledger cont’d
Debit
Credit
left
right
Revenues represent an increase in equity.
Equity increases on the right side.
So, the Fees Earned (Revenue) account is credited
Expenses and drawings represent decreases in equity.
Equity decreases on the left side
So, the Expenses and Drawings accounts are debited

8. GAAP – The Revenue Recognition Convention
The revenue recognition convention states that revenue must be ___________________ in the accounts (recognized) ______ ______ _________the _____________________ ______ ___________________

9. BAF3M1 The Expanded Ledger: Revenue, Expenses, and Drawings
Chapter 5, Section 5.2

10. The Income Statement
A financial statement that summarizes the items of _________________ ________ ______________, and shows ________ ___________or _______ __________ of a business for a given period of time
See handout “Steps in Preparing The Income Statement”

11. GAAP – The Time Period Concept
The time period concept provides that accounting will take place over _____________ _________ ________________ known as fiscal periods
The fiscal year does not have to be the same as the calendar year (Jan to Dec).
For example, a fiscal year could begin on July 1, 2009 and end on June 30, 2010.
Half-yearly, quarterly, or monthly fiscal periods are used by some businesses.

12. GAAP – The Matching Principle
The matching principle states that each ____________ ___________ related to _______________ ____________ must be recorded in the ________ _____________ as the revenue it helped to earn
For example, suppose a business purchases $ of advertising on credit (terms 30 days) for a Boxing Day sale to be held on December 26,
If the fiscal period ends December 31, 2001, the cost of the advertisement will be recorded in December, not January 2002 when the bill is to be paid.
Suppose the advertisement was for a number of days to promote a 2 week sale (last week of Dec 2001 and first week of Jan 2002).
Since the ad now helps generate revenue in two different fiscal periods, a portion of the ad expense will be recorded in each year.

13. Chart of Accounts
To help organize the expanded ledger, it is customary to number the accounts in the ledger. These numbers are used for identification and reference
A chart of accounts is a list of the ledger accounts and their numbers arranged in ledger order
Assets
Liabilities
Owner’s
Equity
Capital
Drawings
Revenues
Expenses

14. BAF3M1 The Expanded Ledger: Revenue, Expenses, and Drawings
Chapter 5, Section 5.3

15. Equity Relationships and the Balance Sheet
RECALL:
Four types of accounts in the equity section of the ledger—a) capital, b) revenue, c) expense, and d) drawings.
_______________ in ______________are recorded in the ____________, _______________, and _________________ accounts.
The difference between total revenues and total expenses is the net income or the net loss.
The net income (or net loss) figure along with the drawings figure, _____________ _____ ________________(___ ________________) in ______________.

16. Equity Relationships and the Balance Sheet cont’d
Today, we are going to learn about the relationship between the income statement and the balance sheet.
We’ve established:
The net income (or net loss) figure along with the drawings figure, shows the increase (or decrease) in equity.
Let’s take a look at three scenarios showing how these figures impact equity on the balance sheet

17. Changes in Equity Owner’s Equity J. Smith, Capital, January 1, 2009$
Net income $
Drawings
500
Increase in Capital
3 500
J. Smith, Capital, December 31, 2009 $
Scenario 1:
Net income greater than drawings results in an increase in capital
Scenario 2:
A net loss results in a decrease in capital
Owner’s Equity
J. Smith, Capital, January 1, 2009
$10 000
Net loss $
Drawings
300
Decrease in Capital
2 300
J. Smith, Capital, December 31, 2009 $

18. Changes in Equity cont’d
Owner’s Equity
J. Smith, Capital, January 1, 2009 $
Net income $
Drawings
5 000
Decrease in Capital
4 600
J. Smith, Capital, December 31, 2009 $
Scenario 3:
Drawings greater than net income results in a decrease in capital