1. Unit 5 – Revenue and Expense Accounts

2. Key Concepts
Analyze transactions that involve asset, liability, owner’s equity, revenue, and expense accounts
Record the transactions in ledger accounts
Prepare a report form balance sheet
Prepare financial statements from a trial balance

3. General Ledger
Must contain all the accounts required to prepare both financial statements: the balance sheet and the income statement
Type of Account
Use
Asset
Liability
Owner’s equity
Revenue
Expense
Preparation of balance sheet
Preparation of income statement
- For each item in each type of account there is an account in the general ledger.

4. Review – Revenue Accounts
Revenue – money or the promise of money received from the sale of goods and services
Examples
Gym obtains revenue from members’ fees
A real estate firm earns commissions from selling houses
Professionals such as lawyers, accountants, and dentists earn fees from their clients for their services
The different types of revenue earned determine the number of revenue accounts necessary

5. Review Expense Accounts
Expenses: the costs incurred to generate revenue
A separate account is set up for each major type of expense.
Criteria to determine whether a separate account is needed
(1) – frequency of usage
(2) – dollar value of expenditure
Small expenditures that occur infrequently are normally collected in an account together. (Miscellaneous)

6. Review – Debit/Credit for Balance sheet Accounts
Assets
= Liabilities
+ Owner’s Equity
Debit
Credit
LHS =
RHS

7. Revenue/Expenses & Owner’s Equity
Debit
** Expenses decrease owner’s equity.
(recorded on the debit side)
Credit
** Revenue increases owner’s equity.
(recorded on credit side)

8. Summary – Revenue & Expense Accounts
Revenue Accounts
Debit
Credit
Expenses are recorded as debits because expenses decrease equity.
Revenue is recorded as a credit because revenue increases equity.
Why create separate accounts for each type of revenue and expense?
- To monitor which sources are contributing most to the company’s revenue, and which ones may becoming too expensive for the company.

9. Review – Transaction analysis
At least two accounts are involved in recording every business transaction.
Total debits = Total credits
(for each transaction)
The following examples will involve the 5 types of accounts we have looked at: assets, liabilities, owner’s equity, revenue, and expense.

10. Example 1 Mar. 1 – Received $35 from a client for cutting
and styling hair.
Cash
Mar
Fees Earned (Revenue)
Mar

11. Example 2 Mar. 5 – Billed P. Milne $75 for cut and style.
Which accounts are involved?

12. Example 2 Mar. 5 – Billed P. Milne $75 for cut and style.
Accounts Receivable
Mar
Fees Earned (Revenue)
Mar
Mar

13. Example 3
Mar. 10 – Paid $200 to Bell Canada for telephone bill received today.
Which accounts are involved?

14. Example 3
Mar. 10 – Paid $200 to Bell Canada for telephone bill received today.
Cash
Mar
Mar
Telephone Expense
Mar

15. Example 4
Mar. 18 – Received a bill from the Barrie Advance for $545 for advertising. The terms of payment allow 30 days to pay. The bill will be paid later.
Which accounts are involved?

16. Example 4
Mar. 18 – Received a bill from the Barrie Advance for $545 for advertising. The terms of payment allow 30 days to pay. The bill will be paid later.
Accounts Payable
Mar
Advertising Expense
Mar

17. Example 5
Mar. 23 – Paid $200 to the Barrie Advance as partial payment of their bill received previously.
Which accounts are involved?

18. Example 5
Mar. 23 – Paid $200 to the Barrie Advance as partial payment of their bill received previously.
Accounts Payable
Mar
Mar
Cash
Mar
Mar
Mar

19. More examples…
Pages 79-81
6 more transactions.

20. The Drawings Account
Records the withdrawal of money or other assets from the business by the owner for personal use.
This action the value of the owner’s equity. (similar to an expense transaction)
Cannot be considered an expense, as this withdrawal does not help to produce additional revenue.

21. The Drawings Account Cont.
Withdrawal of funds affects investment, the Drawings account is an equity account.
Owner’s equity section of the general ledger
Normally has a debit balance
Withdrawals decrease owner’s equity.

22. Examples – Drawings account withdrawals
Withdrawing cash
Removing merchandise for personal use
Taking the equipment from the business for personal use
Using company funds for personal expenses of the owner of the owner’s family.

23. Examples – Drawings account withdrawals
C. Piccolo, Drawings
Debit
Credit
** Withdrawals are recorded as debits because they decrease capital **
Example: On October 15, C. Piccolo, the owner, withdrew $1000 cash from the business for personal use.
C. Piccolo, Drawings
Oct
Cash
Oct
* The payment of wages or salaries to an owner must be recorded in the Drawings account of income tax purposes. (not as an expense)

24. Summary – General Ledger
See Figure 3.5 – Page 84 of your textbook

25. Equity Accounts on the Balance Sheet
Income statement 1st
- the net income/loss affects the balance sheet
Owner’s capital account
- record of the owner’s investment in the business. (owner’s claim against the assets)
if there is net income earned or if the owner increases the assets of the business.
if there is a net loss or if the owner withdraws assets from the business for personal use

26. Ex: 1- Capital increases when withdrawals are less than net income:

27. Ex: 2 - Capital decreases when withdrawals are greater than net income:

28. Ex: 3 - Capital decreases when there is a loss and the owner has withdrawn assets:

29. Different Forms of the Balance Sheet
Account form – lists the assets on the LHS, and the liabilities and owner’s equity on the RHS. (what we have done up to now) Report form – lists the assets, liabilities, and owner’s equity vertically. Assets = Liabilities + Owner’s Equity (always applies)

30. Report Form Balance Sheet Example
Dollar Signs should be placed…
Beside the first figure in each column in both sections of the statement
Beside the final total in both sections of the statement
See Figure 3.9 – Page 87

31. Preparing Financial Statements from the Trial Balance
Trial Balance Income Statement Balance Sheet

32. Activity.
In pairs, use the trial balance on page 88 to create the corresponding income statement and balance sheet. Do this, without looking at page 89.
After you make an attempt, I will go over it with you.

33. For the month ended October 31, 20 -
Goldman’s Gym
Income Statement
For the month ended October 31, 20 -
Revenue
Members’ Fees
Tanning Bed Rental
Towel Rental
$14 600
725
160
$15 485
Expenses
Salaries
Advertising
Telephone
Maintenance
License
Interest
Laundry
Net Income
3 850
2 880
190
650
1 100
1 500 90
10 260
$5 225

34. Liabilities and Owner’s Equity
Goldman’s Gym
Balance Sheet
October 31, 20 -
Cash
Accounts Receivable
Office Supplies
Land
Building
Training Equipment
Total Assets
Assets
$7 650
2 700
695
99 235 $
Liabilities
Accounts Payable
Bank Loan
Mortgage Payable
Total Liabilities
Owner’s Equity
R. Millar, Capital October 1
Add: Net Income for October
Less: R. Millar, Drawings
Increase in Capital
R. Millar, Capital October 31
Total Liabilities and Owner’s Equity
Liabilities and Owner’s Equity
$11 600
63 000
80 000
86 655
$5 225
1 200
4 025 $
90 680