4 EXPANDING THE LEDGER Cr. Balance Owner’s Equity Dr. Balance Dr. Cr. Expands into4Separate accountsDr.Cr.Owner’s CapitalDr.Cr.RevenuesCr. BalanceDr.Cr.Owner’s DrawingsDr.Cr.ExpensesOwner’s EquityDr. Balance
5 A R E L OC OD THE EXPANDED LEDGER Owner’s Equity Dr. Cr. Dr. Cr. Dr. AssetsLiabilitiesOwner’s EquityAssetsDr.Cr.+LiabilitiesDr.Cr.+Dr.Cr.Owner’s Capital+Dr.Cr.Owner’s DrawingsDr.Cr.Revenues+Dr.Cr.Expenses++ARELOCOD
6 Equity Section Summary There are four types of accounts in the equity section:CapitalRevenueExpenses4. DrawingsShow 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 CreditNormal Balance1. Capital: This account will now contain only the equityfigure at the beginning of the fiscal period, plus new capital from the owner, if any.
8 NORMAL BALANCE — OWNER’S DRAWINGS Increase Decrease Debit CreditNormal Balance2. Drawings: Decreases in equity resulting from the owner'spersonal withdrawals. A drawings accountnormally has a debit balance. Drawingsare not a factor when calculatingnet income or loss.
9 NORMAL BALANCES —REVENUES Decrease Increase Debit CreditNormal Balance3. Revenues: Increases in equity resulting from the saleof goods or services. A revenue account normally has a credit balance.
10 NORMAL BALANCES — EXPENSES Increase Decrease Debit CreditExpensesNormal Balance4. Expenses: A decrease in equity resulting from the costs ofproducing the revenue. An expense account normally has a debit balance.
11 Rules of Debit and Credit for Revenue and Expense Accounts Owner's EquityDebitDecreaseCreditIncreaseExpensesRevenueDebitIncreaseCreditDebitCreditIncreaseExpenses AccountsRevenue AccountsDebitIncreaseCreditDebitCreditIncreaseExpenses are recorded as debitsBecause expenses decrease equityRevenue is recorded as a creditbecause revenue increases equity
12 Preparation of balance sheet Preparation of Income Statement THE EXPANDED LEDGERThe General LedgerType of AccountAssetLiabilityOwner’s Equity - CapitalDrawingsRevenueExpensesUsePreparation of balance sheetPreparation of Income StatementNew GAAP Rules1. Revenue Recognition2. The Time Period Concept3. 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 earlierGAAP-The Revenue Recognition ConventionThe 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 Equitythe 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.
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 RememberFor 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 AccountsReceivableThe General LedgerCashSuppliesAssetsEquipmentLandBuildingBalanceSheetAccountsPayableMortgagePayableLiabilitiesBank LoanOwner’sCapitalOwner’sDrawingOwner’s EquitySalesFees EarnedRevenueIncomeStatementAdvertisingExpenseDeliveryExpenseHydroExpenseExpenseMiscellaneousExpenseRentExpenseSalariesExpense
23 Equity Accounts on the Balance Sheet There are 3 scenarios for the Equity section on the Balance SheetCapital increases when withdrawals are less than net incomeOwner’s EquityOwner’s, Capital October 1$20 000Add: Net Income for October$3 000Less: Owner’s Drawings1 000Increase in Capital2 000Owner’s, Capital October 31$22 000
24 Capital decreases when withdrawals are greater than net income Owner’s EquityOwner’s, Capital October 1$22 000Add: Net Income for October$1 000Less: Owner’s Drawings1 500Decrease in Capital500Owner’s, Capital October 31$21 500
25 Capital decreases when there is a loss and the owner has withdrawn assetsOwner’s EquityOwner’s, Capital October 1$21 500Add: Net Loss for October$ 500Less: Owner’s Drawings800Decrease in Capital1 300Owner’s, Capital October 31$20 200