1. Chapter 5: Revenue, Expense and Drawings
The Expanded Ledger

2. Expanding the Ledger
Any change in the equity of the business was recorded in CAPITAL account, no matter what caused the change
There are 3 new accounts that affect owner’s equity.
Revenue
Expense
Drawings

3. Expanding the Ledger (cont)
Revenues: sale of all goods
Expenses: costs related to the revenues
Drawings: owner’s withdrawals for personal use

4. Purpose of Expanding the System
These accounts provide essential information about the progress of the company
Income Statement is prepared with the new accounts (Revenues and Expenses)
Shows the profitability of the company

5. Purpose of Expanding (cont)
Revenue increases the equity of the company
E.g.. Sales, Fees Earned, Revenue, Commissions, etc.

6. Expanding the Ledger
Expenses: costs associated with producing revenue (always decrease equity)
E.g.. Wages Expense, Donations Expense Etc.

7. Net Income / Loss Revenue – Expenses = Net Income or Net Loss
Net Income = Revenues > Expenses
Net Loss = Revenues < Expenses

8. GAAP Principles
Revenue Recognition principle: states that revenue must be recorded in accounts at the time transaction is complete
Matching Principle:
Each expense item related to revenue earned must be recorded in the same time period as the revenue it helped earn

9. Drawings
The owner looks to the profits of the business to provide a livelihood, the owner will be able to take funds out of the business on a regular basis, these withdrawals are a decrease in equity
Account used to record withdrawals of the owner is Drawings

10. Equity Section SummaryCR
Capital
Equity figure at begin of fiscal period
Revenues
Sale of goods or services DR
Expenses
Costs of materials or services
Drawings
Owner’s loss/ withdrawals