The Expanded Ledger: Revenue, Expenses, and Drawings 5 1

Expanded Ledger To date, only one account for owner’s equity (Owner’s capital) Any change was recorded in that capital account, no matter what caused the change Chapter 5 introduces multiple accounts in the equity section; Revenues, related to the sale of goods or services Expenses, which are costs related to the revenues Drawings, which are the owner’s withdrawals for personal use

Why expanded ledger? To provide essential information about the progress of the business We need to be able to answer questions, such as; How much money is being made? How much spent on advertising? Are the wages fair? Is the rent too high? How much was withdrawn from the business for personal expenses?

NO Take a look at Fig. 5.1, page 132 Could we answer the above questions by looking at Figure 5.1? Answer; NO You could make some guesses about the various capital entries but you would not be able to answer the most important question, how much profit was earned in January?

Figure 5.2 – Expanded Capital Account New accounts appear; drawings, fees earned, advertising expense, car expense, rent expense, sundry expense, wages expense The new accounts do not change the procedure for preparing the trial balance learned in chapter 4 We simply transfer the final balance of each account to the proper debit or credit side of the trial balance, then calculate and show the trial balance totals The next slide shows a comparison of the Chapter 4 trial balance and a Chapter 5 trial balance. Note that the Ch. 5 trial balance is far more informative.

Figure 5.3: Expanded Equity Section on Trial Balance PowerPoint 5–1 Chapter 5 Figure 5.3: Expanded Equity Section on Trial Balance 6

Figure 5.4 – Preparing the Income Statement The income statement is a financial report that shows the revenue of a business, subtracts its expenses, and reveals the profit made for a give period of time It is a formal statement prepared for people who are important to the business It is similar to the balance sheet. However, an important component to an income statement, the “when” portion, or the time period covered by the statement Key part is the “bottom line” in other words, the net income or profit of the business. Used by; 1) owners and managers, 2) bankers, 3) investors, 4) income tax authorities

Figure 5.4: Expanded Equity Section on Income Statement PowerPoint 5–2 Chapter 5 Figure 5.4: Expanded Equity Section on Income Statement 8

Chart of Accounts To help organize the expanded ledger, we create a numbering system for all of the accounts. These numbers are used for identification and reference. It can either be three or four digits Three Digit Four Digit Assets 100s 1000s Liabilities 200s 2000s Equity: Capital Drawings Revenues Expenses 300s 400s 500s 3000s 4000s 5000s