1. The Expanded Ledger: Revenue, Expenses, and Drawings5 1

2. Expanded Ledger
To date, only one account for owner’s equity (Owner’s capital)
Any change was recorded in that capital account, no matter what caused the change
Chapter 5 introduces multiple accounts in the equity section;
Revenues, related to the sale of goods or services
Expenses, which are costs related to the revenues
Drawings, which are the owner’s withdrawals for personal use

3. Why expanded ledger?
To provide essential information about the progress of the business
We need to be able to answer questions, such as;
How much money is being made?
How much spent on advertising?
Are the wages fair?
Is the rent too high?
How much was withdrawn from the business for personal expenses?

4. NO Take a look at Fig. 5.1, page 132
Could we answer the above questions by looking at Figure 5.1?
Answer; NO
You could make some guesses about the various capital entries but you would not be able to answer the most important question, how much profit was earned in January?

5. Figure 5.2 – Expanded Capital Account
New accounts appear; drawings, fees earned, advertising expense, car expense, rent expense, sundry expense, wages expense
The new accounts do not change the procedure for preparing the trial balance learned in chapter 4
We simply transfer the final balance of each account to the proper debit or credit side of the trial balance, then calculate and show the trial balance totals
The next slide shows a comparison of the Chapter 4 trial balance and a Chapter 5 trial balance. Note that the Ch. 5 trial balance is far more informative.

6. Figure 5.3: Expanded Equity Section on Trial Balance
PowerPoint 5– Chapter 5
Figure 5.3: Expanded Equity Section on Trial Balance 6

7. Figure 5.4 – Preparing the Income Statement
The income statement is a financial report that shows the revenue of a business, subtracts its expenses, and reveals the profit made for a give period of time
It is a formal statement prepared for people who are important to the business
It is similar to the balance sheet. However, an important component to an income statement, the “when” portion, or the time period covered by the statement
Key part is the “bottom line” in other words, the net income or profit of the business.
Used by; 1) owners and managers, 2) bankers, 3) investors, 4) income tax authorities

8. Figure 5.4: Expanded Equity Section on Income Statement
PowerPoint 5– Chapter 5
Figure 5.4: Expanded Equity Section on Income Statement 8

9. Chart of Accounts
To help organize the expanded ledger, we create a numbering system for all of the accounts. These numbers are used for identification and reference. It can either be three or four digits
Three Digit
Four Digit
Assets
100s
1000s
Liabilities
200s
2000s
Equity:
Capital
Drawings
Revenues
Expenses
300s
400s
500s
3000s
4000s
5000s