1. Chapter 5.1
Expanded Ledger

2. The Expanded ledger changes the accounting system for owners equity
Until now any change in equity was recorded in a single account titled owners equity
With this limited amount of information it is difficult to properly analyse a businesses operations

3. Accountants need to know what is causing changes in owners equity
By expanding the equity section of the ledger and adding three new account sections accountants can track information more accurately
The accounts fall under the following headings; Revenue, Expenses, Drawings

4. Revenue
Revenue is the income produced by the sale of goods and services, the purpose of a business is to produce revenue
Revenue is an increase in owners equity and therefore revenue accounts have a credit balance and an increase in revenue would result in a credit entry to the revenue account

5. Expenses
Expenses are the costs associated with the production of revenue
Rent, wages, fuel, repairs, advertising….etc are all examples of expenses
An expense is a decrease in owners equity
Owners Equity decreases with debit entries and therefore expense accounts have debit balances

6. Net Income Net Loss
Through the revenue and expense accounts a business can determine if it has earned profit (net income) or loss (net loss)
By calculating the difference between total revenue during a certain period and total expenses during that same time a business will ether show a net gain or net loss

7. Drawings
Drawings are the owners taking money from a business for personal use
Drawings represent a decrease in owners equity and are therefore recorded as debit entries
Drawings do not affect net income or net loss
Drawings are deducted after calculating income

8. GAAP GAAP matching principle GAAP revenue recognition convention
Each expense item that helped to earn a revenue must be recorded at the same time as the revenue that it helped to be earned
GAAP revenue recognition convention
Revenue recognition convention states that revenue must be recorded in the accounts at the same time the transaction is completed