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

The Expanded Ledger and the Income Statement

The recording process continued!

Unit

3

NORMAL BALANCENORMAL BALANCE

Every account classification has a normal balance, whether it is a debit or credit.

= +Assets

Dr. BAL

Cr.

Liabilities

Dr. Cr. BAL

Dr.

Owner’s Equity

Cr. BAL

Assets Liabilities Equity

NORMAL BALANCE — OWNER’S EQITYNORMAL BALANCE — OWNER’S EQITY

Owner’s Equity

Decrease Increase Debit Credit

Normal Balance

EXPANDING THE LEDGEREXPANDING THE LEDGER

Owner’s Equity

Dr. Cr.

Owner’s Capital

Dr. Cr.

Owner’s Drawings

Dr. Cr.

Revenues

Dr. Cr.

Expenses

Owner’s Equity:

Expands into 4

Separate accountsCr.

Balance

Dr. Balance

THE EXPANDED LEDGERTHE EXPANDED LEDGER

LiabilitiesAssets Owner’s Equity

Assets

Dr. Cr.+

Liabilities

Dr. Cr. +

Dr. Cr.

Owner’s Drawings

+ Dr. Cr.

Revenues

+Dr. Cr.

Expenses

+ Dr. Cr.

Owner’s Capital

+

A L OC OD R E

Equity Section Summary There are four types of accounts in the equity section:

1. Capital2. Revenue3. 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

NORMAL BALANCE — OWNER’S CAPITALNORMAL BALANCE — OWNER’S CAPITAL

Owner’s Capital


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.

NORMAL BALANCE — OWNER’S DRAWINGSNORMAL BALANCE — OWNER’S DRAWINGS

Owner’s Drawings

Normal Balance

Increase Decrease Debit Credit

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.

NORMAL BALANCES —REVENUES

Revenues


3. Revenues: Increases in equity resulting from the sale of goods or services. A revenue account

normally has a credit balance.

Normal Balance

NORMAL BALANCES — EXPENSESNORMAL 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.

DebitDecrease

Credit Increase

Owner's Equity

DebitIncrease

Credit

Expenses

Debit Credit Increase

Revenue

DebitIncrease

Credit

Expenses Accounts

Debit Credit Increase

Revenue Accounts

Expenses are recorded as debitsBecause expenses decrease equity

Revenue is recorded as a credit because revenue increases equity

Rules of Debit and Credit for Revenue and Expense Accounts

THE EXPANDED LEDGERTHE EXPANDED LEDGER

Type of AccountAsset

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

The General Ledger

To help guide the organization of these accounts and how they are used accountants/bookkeepers turn to New GAAP policies mentioned earlier

G.A.A.P

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.

GAAP-The Revenue Recognition Convention

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.

GAAP-The Time Period Concept

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.

GAAP-The Matching Principle

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.

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.

THE INCOME STATEMENT

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:

INCOME STATEMENT PREPARATION

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.

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:

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

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.

Assets

Liabilities

Owner’s Equity

Revenue

Expense

Balance Sheet

IncomeStatement

CashAccounts Receivable Supplies

Land Building Equipment

AccountsPayable Bank Loan

Mortgage Payable

Owner’s Capital

Owner’sDrawing

Sales Fees Earned

AdvertisingExpense

MiscellaneousExpense

DeliveryExpense

HydroExpense

RentExpense

SalariesExpense

The General Ledger

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


Equity Accounts on the Balance Sheet

1. Capital increases when withdrawals are less than net income

There are 3 scenarios for the Equity section on the Balance Sheet

Owner’s Equity


Add: Net Income for October $1 000

Less: Owner’s Drawings 1 500

Decrease in Capital 500


2. Capital decreases when withdrawals are greater than net income

Owner’s Equity


Add: Net Loss for October $ 500

Less: Owner’s Drawings 800

Decrease in Capital 1 300


3. Capital decreases when there is a loss and the owner has withdrawn assets

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

Documents

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