CHAPTER 2 TOPIC 2 EXPANDED ACCOUNTING EQUATION

TERMINOLOGY  Revenue and Expense Transactions:  financial events that determine the profit (or loss) of a business.  Goods  Sales (the main source of revenue for firms that sell goods)  Services  commissions (the fees a business charges for buying or selling goods, for example, real estate, for clients)  Accounts Receivable  an asset representing amounts due from customers (promise to pay)

TERMINOLOGY REVENUE (always increases OE)  Inflow of assets through the sale of goods or services  EX: commissions, fees earned, etc. NET INCOME  Excess of revenue over expenses  Profitable EXPENSES (always decreases OE)  Cost of doing business to increase revenue.  EX: telephone expense, utilities expense, advertising expense, insurance expense NET LOSS  Excess of expenses over revenue  Not profitable

GAAPS  When is revenue recognized? (when the transaction takes place or when you receive money)  When is expense recognized? (when the transaction has incurred or when you have paid for the expense)  What do you compare to figure out if you made a profit or not?(which accounts and for which time periods)

GAAP  Revenue Principle  Revenue must be recognized as at the time of the sale of goods, or as at the time of the rendering of services.  Defines revenue, measures revenue, and recognizes revenue.  Expense Principle  Expenses must be recognized and recorded when they are incurred.  Defines expense, measures expense, and recognizes expense.

GAAP  After accounting for revenue and expense transactions for a definite period of time, say one month, you must subtract the total expenses incurred from the total revenue earned to calculate the profit or loss for the period.  Matching Principle  Revenue and expenses must be correlated to report the net income (net loss) for an accounting period.  Example: January revenue is matched with January expenses to find profit/loss.  Non-Example: January – March revenue is matched with expenses for January – February.  Examples: page 40-41

TRANSACTION 1  As at December 31, C. Leport Real Estate has received $ in cash, referred to commissions (revenue), for buying and selling homes, land and other forms of real estate for clients.  What two accounts are affected?  Increase or decrease?

ANSWER 1  Cash – increases by $  Commissions/Revenue – increases by $26 000

TRANSACTION 2  As of December 1, C. Leport earned commissions (revenue) on credit by providing real estate services as follows:  $6000 for selling a house for Pat Rogers  $4000 for selling a residence for. Scobie  $ for buying properties for Shannon Development  All customers have 30 days to pay.  What does this mean?  Revenue was earned, however, cash was not received but a promise to pay at a later date – which means accounts receivable was affected.

ANSWER 2  Commissions Earned (revenue) – increases by $  Accounts Receivable/Pat – increases by $6000  Accounts Receivable/Scobie – increases by $4000  Accounts Receivable/Shannon Development – increases by $  The accounting equation should still balance!

TRANSACTION 3  On December 31, C. Leport Real Estate receives a bill for $3000 from the Leader Post for running three advertisements at different times throughout the month of December. C. Leport has thirty days to pay.  What two accounts are affected?  Are they increase or decreasing?  Remember capital (owner investment) and revenue (inflow of assets from sale of goods or services) – increases owner’s equity  Remember drawings (withdrawal of assets for personal use) and expenses (cost of doing business – used to help you operate) – decreases owner’s equity

ANSWER 3  Advertising Expense – decrease  Account Payable/Leader Post - increase

MORE EXAMPLES  Topic 2 page 33 – 39  Matching Principle Explained page

TOPIC 2 ASSIGNMENT  Chapter Questions  Problem 2-4 and 2-5