1. Chapter 5 Notes Expanding the Ledger

2. Question: What is the purpose of expanding the ledger?

3. Revenues are an increase in equity result from the sale of goods or services Expenses are a decrease in equity resulting from the costs of the materials and services used to produce the revenue. SO 2 Define debits and credits and explain their use in recording business transactions. Revenue and Expense

4. The owner’s withdrawals for personal use. SO 2 Define debits and credits and explain their use in recording business transactions. Drawings Question: What do we use the Capital Account for now?

5. Accounts arranged in sequence in which they are presented in the financial statements. Chart of Accounts SO 6 Explain what posting is and how it helps in the recording process.

10. Who uses the Income Statement? Owners and Managers Tells them if their business is making a profit Bankers Tells them if the business can continue to repay their loan Income Tax (Canada Revenue Agency) Every business is required to prepare an income statement as part of their tax return

11. The Fiscal Period Net income is measured over a specific period of time called a fiscal period. You need to know how long it takes a business to make the profit it is reporting on its income statement (a year, a month, a week?) Formal fiscal periods are usually 1 year in length. Fiscal periods for all sole proprietors in Canada must follow the calendar year (January to December) JanuaryDecember Profitability

12. GAAP - The Revenue Recognition Convention States that revenue must be recorded in the accounts at the time the transaction is completed. Cash does not need to have been received to record revenue earned. Question: What kind of problems can this cause when outside parties are analyzing a company’s financial statements?

13. GAAP – The Time Period Concept Provides that accounting will take place over specific time periods known as fiscal periods. JanuaryDecember Profitability

14. GAAP – The Matching Principle States that each expense item related to revenue earned must be recorded in the same period as the revenue it helped to earn. JanuaryDecember Profitability