1. The Expanded Ledger and the Income Statement
Unit 3
The Expanded Ledger and the Income Statement
The recording process continued!

2. NORMAL BALANCE
Every account classification has a normal balance, whether it is a debit or credit.
Assets
Liabilities
Equity
Assets
Dr. BAL
Cr.
Liabilities
Dr.
Cr. BAL
Dr.
Owner’s Equity = +
Cr. BAL

3. NORMAL BALANCE — OWNER’S EQITY
Owner’s Equity
Decrease Increase Debit Credit
Normal Balance

4. EXPANDING THE LEDGER Cr. Balance Owner’s Equity Dr. Balance Dr. Cr.
Expands into 4
Separate accounts
Dr.
Cr.
Owner’s Capital
Dr.
Cr.
Revenues
Cr. Balance
Dr.
Cr.
Owner’s Drawings
Dr.
Cr.
Expenses
Owner’s Equity
Dr. Balance

5. A R E L OC OD THE EXPANDED LEDGER Owner’s Equity Dr. Cr. Dr. Cr. Dr.
Assets
Liabilities
Owner’s Equity
Assets
Dr.
Cr. +
Liabilities
Dr.
Cr. +
Dr.
Cr.
Owner’s Capital +
Dr.
Cr.
Owner’s Drawings
Dr.
Cr.
Revenues +
Dr.
Cr.
Expenses + + A R E L OC OD

6. Equity Section Summary
There are four types of accounts in the equity section:
Capital
Revenue
Expenses
4. Drawings
Show the changes in owner's equity from one period to the next.
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 decisions

7. NORMAL BALANCE — OWNER’S CAPITAL
Decrease Increase Debit Credit
Normal Balance
1. Capital: This account will now contain only the equity
figure at the beginning of the fiscal period, plus new capital from the owner, if any.

8. NORMAL BALANCE — OWNER’S DRAWINGS
Increase Decrease Debit Credit
Normal Balance
2. Drawings: Decreases in equity resulting from the owner's
personal withdrawals. A drawings account
normally has a debit balance. Drawings
are not a factor when calculating
net income or loss.

9. NORMAL BALANCES —REVENUES
Decrease Increase Debit Credit
Normal Balance
3. Revenues: Increases in equity resulting from the sale
of goods or services. A revenue account normally has a credit balance.

10. NORMAL BALANCES — EXPENSES
Increase Decrease Debit Credit
Expenses
Normal Balance
4. Expenses: A decrease in equity resulting from the costs of
producing the revenue. An expense account normally has a debit balance.

11. Rules of Debit and Credit for Revenue and Expense Accounts
Owner's Equity
Debit
Decrease
Credit
Increase
Expenses
Revenue
Debit
Increase
Credit
Debit
Credit
Increase
Expenses Accounts
Revenue Accounts
Debit
Increase
Credit
Debit
Credit
Increase
Expenses are recorded as debits
Because expenses decrease equity
Revenue is recorded as a credit
because revenue increases equity

12. Preparation of balance sheet Preparation of Income Statement
THE EXPANDED LEDGER
The General Ledger
Type of Account
Asset
Liability
Owner’s Equity - Capital
Drawings
Revenue
Expenses
Use
Preparation of balance sheet
Preparation of Income Statement
New GAAP Rules
1. Revenue Recognition
2. The Time Period Concept
3. The Matching Principle

13. G.A.A.P GAAP-The Revenue Recognition Convention
To help guide the organization of these accounts and how they are used accountants/bookkeepers turn to New GAAP policies mentioned earlier
GAAP-The Revenue Recognition Convention
The revenue recognition convention states that revenue must be recorded in the accounts (recognized) at the time the transaction is completed.
It is important to take revenue into the accounts correctly.
If this is not done, the income statements of the company will be incorrect, and the readers of the financial statements will be misinformed.

14. GAAP-The Time Period Concept
The time period concept provides that accounting will take place over specific time periods known as fiscal periods.
Net income is measured over a specific length of time, called the fiscal period. The fiscal period (also called the accounting period) is the period of time over which earnings are measured.
These fiscal periods are of equal length and are used when measuring the financial progress of a business.

15. GAAP-The Matching Principle
The matching principle states that each expense item related to revenue earned must be recorded in the same period as the revenue it helped to earn.
Separating revenues and expenses into specific fiscal periods challenges accountants to follow two important steps.
In step one, they must be careful to record the proper amount of revenue in the proper period.
In step two, they must subtract only those expenses that helped earn the revenue they recorded in step one.

16. Income Statement Accounts
Revenue and Expenses:
are Income Statement accounts because they are BOTH need in order to determine if there has been an increase or decrease in the Owners Equity
the income statement shows in a detailed way whether the business is profitable or not.
new equity accounts are organized to show the net income (or net loss) of the business for a given period of time.

17. THE INCOME STATEMENT

18. INCOME STATEMENT PREPARATION
The four steps followed in preparing an income statement are described on the following pages.
The three-line heading is centred at the top of the page and is designed to provide information in this sequence:
The income statement provides data for a given time period (a week a month, a year),
The balance sheet provides data on a specific date.
The income statement loses its usefulness if the accounting period is not specified.

19. The revenue received from the business operations is listed under the subheading Revenue.
The largest revenue item is usually listed first.
The revenue is totalled and the total is placed in the right column as follows:

20. The expense items are listed in the order in which they appear in the ledger.

21. In this case a net income is the result.
Net Income is not cash.
It is the difference between total revenues and total expenses, if the revenues are greater than the expenses.
In this case a net income is the result.
A net loss occurs if the expenses are greater than the revenues.
Facts to Remember
For the income statement, dollar signs should be placed:
• beside the first figure in each column; and
• beside the net income or net loss figure at the bottom of the statement.

22. Balance Sheet Income Statement
Accounts
Receivable
The General Ledger
Cash
Supplies
Assets
Equipment
Land
Building
Balance
Sheet
Accounts
Payable
Mortgage
Payable
Liabilities
Bank Loan
Owner’s
Capital
Owner’s
Drawing
Owner’s Equity
Sales
Fees Earned
Revenue
Income
Statement
Advertising
Expense
Delivery
Expense
Hydro
Expense
Expense
Miscellaneous
Expense
Rent
Expense
Salaries
Expense

23. Equity Accounts on the Balance Sheet
There are 3 scenarios for the Equity section on the Balance Sheet
Capital increases when withdrawals are less than net income
Owner’s Equity
Owner’s, Capital October 1
$20 000
Add: Net Income for October
$3 000
Less: Owner’s Drawings
1 000
Increase in Capital
2 000
Owner’s, Capital October 31
$22 000

24. Capital decreases when withdrawals are greater than net income
Owner’s Equity
Owner’s, Capital October 1
$22 000
Add: Net Income for October
$1 000
Less: Owner’s Drawings
1 500
Decrease in Capital
500
Owner’s, Capital October 31
$21 500

25. Capital decreases when there is a loss and the owner
has withdrawn assets
Owner’s Equity
Owner’s, Capital October 1
$21 500
Add: Net Loss for October
$ 500
Less: Owner’s Drawings
800
Decrease in Capital
1 300
Owner’s, Capital October 31
$20 200