Expanded Ledgers

Providing the Information Solution What we need to do is take all the transactions from E. Boa, Capital and start putting them into their own accounts with good titles.

Providing the Information Solution If we add up all the balances of these new accounts, we will get the same number that was in the balance of the capital account.

The Income Statement As you can see, this is still a trial balance, it is just more detailed. DO NOT BE CONFUSED BY THIS. We now have to introduce a new report. It is called an income statement and it is used to show the total income made by the business. It shows revenues, subtracts expenses, and reveals profit.

The Income Statement

We do not include Capital or Drawings…we will talk about these later. Fees earned goes on the right side (WHY?) under Revenue. Individual expenses are listed to the left. You subtract the expenses from the revenue. Income statements are formal documents so they must have the same preparation.

Name of Owner Name of Document Time period covered

The Income Statement We call the “Income Earned” the “Bottom Line.” You will hear this a lot. It is officially called Income Earned, but Bottom Line is an expression that is used a lot. From here, we have to go over some terminology.

Revenue Selling things creates revenue. (Goods or services) Revenue or Income refers to an increase in equity. Businesses can have one or more revenue accounts. How do loan companies make money? They make money on interest. Their “Revenue Account” could be called “Interest Revenue.” A merchandising business would name their account “Sales.”

Revenue Sometimes you can have more than one source of revenue. Each one would then get a name. “Interest Revenue,” “Sales,” “Royalties,” etc.

Expenses These are costs that a business has to have to make money. Rent, wages for employees, utilities, advertising, etc. Some account names could be “Rent expense.” “Delivery Expense.” “Insurance Expense,” “Bank Charges,” and “Postage.”

Expenses Not every expense goes into the Expense account. If we buy land or a building, we debit the Buildings Account. We will learn more about this in Chapter 8.

Net Income or Net Loss We use Revenue and Expense accounts to figure out whether or not or business has earned a net income (profit). Net Income is the difference between the total revenues and the total expenses (if the revenues are greater). Net Loss occurs when revenues are less than expenses.

The Income Statement Put to Use By owners and managers -Tells them if there is a profit, and if there is how much. -This will help them create goals and policies as well as business decisions. -You can compare with previous years to see patterns. If there are problems, they can be fixed. By Bankers -They need to see the statements of anybody they loan money to. This lets them know if the business would be able to pay back the loan.

The Income Statement Put to Use By Investors -Banks are not the only place for businesses to get money. -If it looks like a company can turn a profit, they are attractive to investors. -Small businesses usually get friends or family to invest. -Bigger corporations can be invested in by anyone. -Investment companies exist to invest in small companies. Income Tax Authorities -Government uses this statement to determine how much tax a business is owed.

Drawings Drawings occur when an owner takes money out of the company for personal use. Owners are allowed to do this. In many cases, they do not take a normal salary. They are NOT expenses. Drawings are not related to revenue. They get their own account.

Chart of Accounts In most businesses, accounts are given code numbers. It is usually a 4-digit number. Quick identification is its purpose.

Chart of Accounts A Chart of Accounts is a list of the ledger accounts with their numbers listed in ledger order. Most businesses have a copy of this list for employees to see and learn.

Equity Section Summary There are four types of accounts in the equity section: 1. Capital – Normally only has the beginning equity and new investments from the owner. Normally a credit balance if business is doing well. 2. Revenues – Increases come from the sale of goods or services. 3. Expenses – Decreases in equity because of costs of materials or services used to produce revenue. 4. Drawings - Decreases in equity resulting from the owner taking money out for personal use.

What is wrong with this Income Statement?

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