1. Revenue, Expenses & Drawings
Chapter 5 Notes
The Expanded Ledger
Revenue, Expenses & Drawings
The Unit 2 test (covering chap 4 and chap 5) will occur on Wed October 15

2. Net Income (or Net Loss)
NI = Revenues – Expenses
NI = Net Income
Revenue = Total Revenue
Expenses = Total Expense
The purpose of making Income Statement is to show this formula: NI = Rev –Exp (show on the board)

3. Net Income (or Net Loss)
It is from the revenue and expense accounts that a business can tell whether or not the business has made money or lost money. (This is very important for most readers of accounting information)
If they made money, then they earned net income. (= “profit” or “bottom line” or “earning”: these are interchangeable)
If they lost money, then they had net loss.
Net income is the difference between the total revenues and total expenses

4. Net Income (or Net Loss)
Assuming that stock price for these companies are same, which company should you invest in?
Samsung : Total Revenue is 25M$ and Total Expense is 16M$
Sony: Total Revenue is 41M$ and Total Expense is 36M$
Toshiba : Total Revenue is 56M$ and Total Expense is 64M$

5. Net Income (or Net Loss)
Net Income indicates how much this company is making for this period.
N I = Total Revenue – Total Expense
Therefore, if the stock prices are the same, then you should invest in Samsung. You should invest in Samsung because their net income is the highest amount. (25M – 16M = 9M$)
Sony makes only 5M$ net income and Toshiba made 8M$ net loss.

6. Net Income (or Net Loss)
Net Income number is an important number for investors and bankers because Net Income number shows how much profit (or income) the company is making every year or month or quarter.
N I = Total Revenue – Total Expense

7. Drawings
In a healthy business, the owner will be able to withdraw money of the business on a regular basis much like a salary
This account keeps track of how much money is being drawn by the owner.
These withdrawals of funds by the owner are known as drawings and represent a decrease in equity
Drawings are NOT expenses – they have nothing to do with determining net income or net loss

8. Drawings Ie: Mike Tran, owner, withdraws $300 for personal use:
All entries affecting Drawings follow the rules of debit and credit. Drawings represent a decrease in equity – decreases in equity = debit entries
Drawings account is a contra account of the regular capital account. It appears in Balance sheet.
Drawings normally has a debit balance.

9. To Summarize There are four types of accounts in the equity section:
Capital:
This account will now contain only the equity figure at the beginning of the month, plus any new capital that owner invested during the month. This account normally has a credit balance.
Balance sheet account

10. To Summarize There are four types of accounts in the equity section:
Drawings:
Decreases in equity resulting from the owner’s personal withdrawals. A drawings account normally has a debit balance
Balance sheet account

11. To Summarize Revenues:
There are four types of accounts in the equity section:
Revenues:
Increases in equity resulting from the sale of goods or services. Normally, this account has a credit balance
Income statement account
Expenses:
Decreases in equity resulting from the costs of materials or services used to produce the revenue. Normally this account has a debit balance.

12. The Income Statement
A financial statement that summarizes the items of revenue and expenses and shows the net income or loss of a business for a specific period of time

13. ** Drawings are treated the same as an Expense or Asset, with the Debit increasing on the left and Credit decreasing on the right. **Think / Pair for 4 minutes

14. Income Statement
Income statement - a financial statement that shows a business’s profit (or loss) over a stated fiscal period (such as one month or one year.)
Income statement is required by Canada Revenue Agency (government body, which collects tax in Canada) for income tax purpose.
Income Statement will try to answer the folloing question of the reader: “How profitable is the business to the owner?”

15. Four Steps to making an Income Statement:
1. The Heading:-Who? What? When?
Name of business
Name of Statement (Income Statement)
Accounting period (“For the year ended December 31” or “For the month ended September 30” or “For the quarter ended March 31”)

16. Four Steps to making an Income Statement:
2. Revenue Section:
There may be more than one account especially if there are many different kinds of income.
For example, if Hair Salon sells hair product and hair cut service, they would most likely have two separate accounts for revenue. In this example, “Fees earned” account and “ Hair product” account will exist at the same time.
Remember that revenue increase AR transactions. In other words, even if the customer has not paid in September (promised that he will pay in October), this revenue will be included in September.

17. Four Steps to Creating an Income Statement:
3. Expenses:
Decreases in equity – There are many accounts under the subheading of “Expense” such as advertising expense, salary expense, utilitlity (electricity) expense, rent expense, interest (for loan or mortgage) expense etc… !
4. Net Income or Net Loss figure:
Net income is NOT cash. It is the difference between total revenues and total expenses
Net Income = Total Revenue- Total Expenses

18. Mark’s Repair Shop Income Statement
Step 1
Statement Headings
Mark’s Repair Shop
Income Statement
For the month ending September 30, 20__
Revenue
Repairs Revenue $
Total Revenue $
Expenses
Salaries $
Rent
Advertising
Supplies
Utilities
Insurance
Delivery Expense
Total Expenses $
Net Income $
Step 2
Organize Revenue Section
Step 3
Organize Expenses Section
Step 4
Calculate Net Income/Loss

19. Classwork / Homework P140 #1 to 17 P141 Exercise #1
P141 Exercise #3A and #3C