Unit 5 – Revenue and Expense Accounts

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

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.

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

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)

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

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)

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.

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.

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

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

Example 2 Mar. 5 – Billed P. Milne $75 for cut and style. Accounts Receivable Mar.5 75 Fees Earned (Revenue) Mar.1 35 Mar. 5 75

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

Example 3 Mar. 10 – Paid $200 to Bell Canada for telephone bill received today. Cash Mar.1 35 Mar. 10 200 Telephone Expense Mar. 10 200

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?

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. 18 545 Advertising Expense Mar. 18 545

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

Example 5 Mar. 23 – Paid $200 to the Barrie Advance as partial payment of their bill received previously. Accounts Payable Mar. 23 200 Mar. 18 545 Cash Mar.1 35 Mar. 10 200 Mar. 23 200

More examples… Pages 79-81 6 more transactions.

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.

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.

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.

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 15 1 000 Cash Oct. 15 1 000 * The payment of wages or salaries to an owner must be recorded in the Drawings account of income tax purposes. (not as an expense)

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

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

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

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

Ex: 3 - Capital decreases when there is a loss and the owner has withdrawn assets:

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)

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

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

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.

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

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 2 700 695 225 000 110 000 99 235 $245 280 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 $154 600 90 680