Revenue and Expense Accounts Working with Income Statements Accounts

Income Statement Accounts Revenue and expense data is needed to prepare an income statement for an accounting period A company’s general ledger must contain all the accounts required to prepare both financial statements: The balance sheet – asset, liability and owners equity accounts The income statement – revenue and expense accounts

Income Statement Accounts Revenue Accounts Revenue is the proceeds from the sale of goods or services A separate revenue account is set up for each distinct type of revenue earned Examples: Membership fees, credit sales, cash sales

Income Statement Accounts Expense Accounts Expenses are the costs incurred to generate revenue A separate expense account is set up for each distinct type of major expense The number of accounts will vary from business to business

Income Statement Accounts Expense Accounts Consider the following when creating expense accounts in the general ledger: Frequency of usage Dollar value of the expenditure Examples: Rent Expense, Advertising Expense, Salaries Expense Small infrequent expenses will be recorded as Miscellaneous Expense or General Expense

Rules of Debit and Credit for Revenue and Expense Accounts Assets = Liabilities + Owner’s Equity Debit Increase Credit Decrease

Rules of Debit and Credit for Revenue and Expense Accounts Owner’s Equity Debit Decrease Expenses decrease Owner’s Equity Expenses are recorded on the debit side Credit Increase Revenue increases Owner’s Equity Revenue is recorded on the credit side

Rules of Debit and Credit for Revenue and Expense Accounts Owner’s Equity Debit Decrease Credit Increase Expense Accounts Debit Decrease Expenses are recorded as debits because expenses decrease equity Credit Increase Revenue Accounts Debit Decrease Credit Increase Revenue is recorded as a credit because revenue increases equity

Rules of Debit and Credit for Revenue and Expense Accounts Separate accounts for revenues and expenses show which sources of revenue are contributing the most to the company’s total revenue and which expenses are increasing too rapidly Remember accounting procedures are to help managers make decisions

Examples Asset and Revenue Transaction Received $175 cash from a client drawing up a new will Cash July 1 175 Fees Earned July 1 175 Transaction Date Account Affected Type of Account Increase/ Decrease Debit/Credit Transaction Amount July 1 Cash Asset Increase Debit $175 Fees Earned Revenue Credit

Examples Asset and Revenue Transaction Billed client $1200 for legal services to close purchase of home Accounts Receivable July 2 1200 Fees Earned July 1 175 July 2 1200 Transaction Date Account Affected Type of Account Increase/ Decrease Debit/Credit Transaction Amount July 2 Accounts Receivable Asset Increase Debit $1200 Fees Earned Revenue Credit

Examples Asset and Asset Transaction Received $600 from the client as partial payment of $1200 billed on July 2 Cash July 1 175 July 3 600 Accounts Receivable July 2 1200 July 3 600 Transaction Date Account Affected Type of Account Increase/ Decrease Debit/Credit Transaction Amount July 3 Cash Asset Increase Debit $600 Accounts Receivable Decrease Credit

Examples Expense and Asset Transaction Paid $95 to Telus for telephone bill received today Telephone Expense July 4 95 Cash July 1 175 July 3 600 July 4 95 Transaction Date Account Affected Type of Account Increase/ Decrease Debit/Credit Transaction Amount July 4 Telephone Expense Expense Increase Debit $95 Cash Asset Decrease Credit

Examples Advertising Expense Accounts Payable Expense and Liability Transaction Received a bill from the Calgary Herald for $150 for advertising. Terms of payment allow 30 days to pay. The bill will be paid later. Advertising Expense July 5 150 Accounts Payable July 5 150 Transaction Date Account Affected Type of Account Increase/ Decrease Debit/Credit Transaction Amount July 5 Advertising Expense Expense Increase Debit $150 Accounts Payable Liability Credit

Examples Liability and Asset Transaction Paid $100 to the Calgary Herald as partial payment of their bill for $150 received on July 5 Accounts Payable July 6 100 July 5 150 Cash July 1 175 July 3 600 July 4 95 July 6 100 Transaction Date Account Affected Type of Account Increase/ Decrease Debit/Credit Transaction Amount July 6 Accounts Payable Liability Decrease Debit $100 Cash Asset Credit