Chapter 5.1 Expanded Ledger

The Expanded ledger changes the accounting system for owners equity Until now any change in equity was recorded in a single account titled owners equity With this limited amount of information it is difficult to properly analyse a businesses operations

Accountants need to know what is causing changes in owners equity By expanding the equity section of the ledger and adding three new account sections accountants can track information more accurately The accounts fall under the following headings; Revenue, Expenses, Drawings

Revenue Revenue is the income produced by the sale of goods and services, the purpose of a business is to produce revenue Revenue is an increase in owners equity and therefore revenue accounts have a credit balance and an increase in revenue would result in a credit entry to the revenue account

Expenses Expenses are the costs associated with the production of revenue Rent, wages, fuel, repairs, advertising….etc are all examples of expenses An expense is a decrease in owners equity Owners Equity decreases with debit entries and therefore expense accounts have debit balances

Net Income Net Loss Through the revenue and expense accounts a business can determine if it has earned profit (net income) or loss (net loss) By calculating the difference between total revenue during a certain period and total expenses during that same time a business will ether show a net gain or net loss

Drawings Drawings are the owners taking money from a business for personal use Drawings represent a decrease in owners equity and are therefore recorded as debit entries Drawings do not affect net income or net loss Drawings are deducted after calculating income

GAAP GAAP matching principle GAAP revenue recognition convention Each expense item that helped to earn a revenue must be recorded at the same time as the revenue that it helped to be earned GAAP revenue recognition convention Revenue recognition convention states that revenue must be recorded in the accounts at the same time the transaction is completed