P , Required Reading

Expanding the Ledger Until now, we have only used one account to record owner’s equity - Capital. Now, we are adding three new accounts to the equity section: Revenue – related to the sale of goods and services Expenses – costs related to or required to earn the revenues Drawings – owner’s withdrawals for personal use.

Capital The only OE account that we have used to this point is Capital. It represents the owner’s personal claim to the business. We have used this as a “catch all” account. Now, the Capital account will only contain the opening equity figure and any new capital (outside investment) made by the owner.

GAAP - Revenue Recognition Revenue must be recorded at the time the transaction is completed. This convention helps assure that the revenue is not overstated or understated. It means that the income statement of a business will be accurate.

Expenses Expenses are costs directly related to the generation of revenue. They represent a decrease in owners’ equity and therefore represent a DEBIT entry. Many students confuse this, thinking that an increase in expenses is the same as an increase in capital (therefore CREDITING). EXPENSES ARE NOT INCREASES IN OE.

Drawings Drawings are personal withdrawals of funds from a business They have nothing to do with the generation of revenue. Therefore, Drawings do not represent an expense. Drawings reduce equity, so they will be represented by a DEBIT.