Presentation on theme: "CHAPTER 5. EXPANDING THE LEDGER Capital – The amount the owner invests in the business. Revenues – related to the sale of goods or services (i.e. fees."— Presentation transcript:
EXPANDING THE LEDGER Capital – The amount the owner invests in the business. Revenues – related to the sale of goods or services (i.e. fees earned, sale of gym memberships, retail sales, hotel rooms occupied). Expenses – the costs related to the revenues (rent expense, advertising expense, wages expense, car expense) Drawings – the owners withdrawals for personal use.
REVENUE Analyze the following transactions: Eva Boa draws up a legal agreement for J. Basso, a client, and for her services is paid $250 Cash. Eva Boa draws up a legal agreement for J. Basso, a client, and for her services is paid for on credit.
REVENUE Think along the following lines: 1.Revenue represents an increase in equity. 2.An increase in equity is a credit entry. 3.Therefore the Fees Revenue account is credited. Fees Earned DR decreases CR Increases Normal Fees Earned Revenue is an increase in equity resulting from the sale of goods or services in the usual course of business.
EXPANDING THE LEDGER GAAP – The Revenue Recognition Convention The revenue recognition convention states that revenue must be recorded in the accounts (recognized) at the time the transaction
EXPANDING THE LEDGER The new accounts in the equity section of the ledger have one main purpose: to provide essential information about the progress of the business. This information is needed by managers and owners to see if the business is being run profitably, and to help them make sound business decisions.