Chapter 5 Notes The Expanded Ledger Revenue, Expenses & Drawings Stephen and Motashim must see me!

 To date you have been accustomed to having a single account for owner’s equity  Any change in the equity of the business was recorded in that one account, no matter what caused the change – this is not the case any more!  In reality, there are minimum 3 or 4 accounts under Owners Equity subheading. Expanding the Ledger

 In theory, there should be minimum 3 or 4 accounts under Owners Equity subheading. 1. Revenues – related to the sale (=selling) of goods or services 2. Expenses – costs related to revenues (what the business had to pay to make the product or to provide the service) Expanding the Ledger

1. Expenses – costs related to revenues (what the business had to pay to make the product or service) When business incurs expenses, it is bad for the business, so you should debit (or reduce) owner’s equity. When you increase expense account, it is bad for the business, so you debit expense account. Expanding the Ledger

1. Expenses For example, if a Bestbuy owner bought flyer paper (for Bestbuy) from Staples, (in order to use the flyers for Black Friday sale brochure in November) then this entry is an expense for Bestbuy. For Bestbuy, this transaction is: debit to Advertising expense account by $50 and credit to Bank account by $50 Expanding the Ledger

3. Drawings – owner’s withdrawals for personal use Mr. Park owner of “Park Accounting” withdraws $500 to buy coach purse for his wife: We will debit Drawings account and credit Bank account by $500. Expanding the OE (4 accounts)

3. Drawings Since it is impossible to show every sub- accounts under “Revenue” and under “Expense”, accountants use Income Statement to show all the sub-accounts, which are under “Revenue” and “Expenses”. Remember, if a boy or a girl asks you, “may I marry you?”  you should ask, “can I see your income statement” instead of saying, “how much do you make a year?” Expanding the OE (4 accounts)

 To provide essential information about the progress of the business  Helps managers run the business and determine profitability  Some of the new accounts will be used to make an income statement which shows whether the business is profitable or not Purpose – Why Expand?

 Selling goods or services produces revenue  Revenue is an increase in equity resulting from the sale of goods or services in the usual course of business Ie: Mike Tran, a barbor gives haircut for his client Park, and Park paid cash of $20, then this is a revenue for Mike. Revenue

If a reliable customer (owner of Boston Pizza, which is next door) buys a laptop from futureshop and promises that he will pay back 30 days later. Is this a revenue? He signed sales invoice.  Debit AR and Credit Inventory If a stranger customer walks into futureshop and promises that he will pay back 30 days later. My store worker (who has worked only two weeks) let the customer take the laptop home. Is this a revenue for futureshop? (Discuss !) This one is an open ended question.  Not Revenue because there is not a reasonable assurance of collecting the money. Revenue

 Revenue for service business is called Fees Earned (revenue) avccount. Revenue represents an increase in equity An increase in equity requires a credit entry Therefore, Fees Earned (revenue) account is credited just like the revenue account, when the business makes sales. *** Thus, all similar transactions affecting revenue (or fees earned) will be credited to the Fees Earned account. This account will have a credit balance Revenue

 Expenses are costs associated with producing revenue  Examples are Rent payment, wages, utilities (hydro), advertising, etc  An Expense represents a decrease in equity resulting from the costs of producing the revenue  To decrease equity account, you have to debit it.  Therefore, expense account normally has a debit balance. Expenses

 To increase expense account, you will make a debit entry.  To decrease expense account, you will make a credit entry. Expenses

 Ie: Tristan pays his employee barber the regularly weekly wage of $ in cash Both bank and equity decreases by 400. This decrease to equity is REALLY an expense. It must be debited to an expense account. In this case, Wages Expense account is debited and bank account is credited. Show the T account transactions in the space below this line. Expenses

Classwork / Homework for today is P140 Review #1 - #3 P150 Ex 1 and Ex 4 Expenses