Unit # 5 – Revenue & Expense Accounts

Unit # 5 – Revenue & Expense Accounts

Unit # 5 – Revenue & Expense Accounts • To date we have learned about various types of Asset and Liability accounts, but only one Owner’s Equity Account (Capital). • We will be introduced to 3 new accounts • Revenue • Expenses • Drawings

Unit # 5 – Revenue & Expense Accounts • Before we start, we must know how these accounts operate. • First off, they are all new accounts under Owner’s Equity (giving us a total of 4 accounts) • Capital • Revenue • Drawings • Expenses

Unit # 5 – Revenue & Expense Accounts • To review • Revenue is money received from sale of goods or services. • Expenses are the cost to sell goods (and earn Revenue) and operate the business.

Unit # 5 – Revenue & Expense Accounts • So what is the “Drawings” Account? • The Drawings Account is the account that keeps track of any (or all) the money an Owner “withdrawals” from the business. • It is listed under the Owner’s Equity section because it effects “Net Worth” of the company.

The Balance Sheet A = L + OE Assets Liabilities Owner’s Equity (including Capital & Drawings) The Income Statement NI = R - E Revenue Expenses Unit # 5 – Revenue & Expense Accounts

Unit # 5 – Revenue & Expense Accounts • Debits & Credits with respect to Revenue, Expenses, and Drawings Accounts • Ok, so we already know there is an increase in Capital we Credit (use the RHS)of the T-Account. • A decrease we Debit (use the LHS).

Unit # 5 – Revenue & Expense Accounts • Revenue acts the exact same as Capital. • Increase = Credit (RHS), Decrease = (Debit) LHS of T-Account • This is because Revenue has a positive effect on Capital. • Think about it, the money more you make by selling goods or services, the greater the company Net Worth.

Unit # 5 – Revenue & Expense Accounts • Therefore, Expenses act the opposite, because they lower Net Worth. • Increase = Debit (LHS) • Decrease = Credit (RHS) • Drawings act the same as Expenses because it is money being taken out of the company (lowering Net Worth) • Increase = Debit (LHS) • Decrease = Credit (RHS)

Unit # 5 – Revenue & Expense Accounts • Lets put it all together under the Owner’s Equity section. • Capital & Revenue we Credit (use the RHS to increase), Debit (LHS to decrease). • Drawings & Expenses, we Debit (use the LHS to increase), Credit (RHS to decrease).

Unit # 5 – Revenue & Expense Accounts • Tarantino Hint: • Notice the “C” & “R” from Capital & Revenue form “CR”– These accounts are Credited (CR) to increase (RHS). • Notice the “D” & “E” from Drawings & Expenses form “DE”– These accounts are Debited (DR) to increase (LHS)

Unit # 5 – Revenue & Expense Accounts • One more thing about the Drawings Account • It is known as a “Contra Account” (This is your first, we will have more) because they act contrary to the account they are married with. • Drawings is “married” to Capital. • Because owner uses the Capital Account to invest money into the business – The owner uses the Drawings Account to take money out of the business for personal use.

Unit # 5 – Revenue & Expense Accounts • Example # 1: Jul. 1 -Received $175 cash from a client for drawing up a new will.

Unit # 5 – Revenue & Expense Accounts • Example # 2: Jul. 2 - Billed client $1200 for legal services to close purchase of home.

Unit # 5 – Revenue & Expense Accounts • Example # 3: Jul. 3 – Received $600 from the client as partial payment of $1200 billed on July 2.

Unit # 5 – Revenue & Expense Accounts • Example # 4: Jul. 4 – Paid $95 to Telus for telephone bill received today.

Unit # 5 – Revenue & Expense Accounts • Example # 5: Jul. 5 – Received a bill from the Toronto Star for $150 for advertising the new location of the practice. The terms of payment allow 30 days to pay. The bill will be paid later.

Unit # 5 – Revenue & Expense Accounts • Example # 6: Jul. 6 – Paid $100 to the Toronto Star as partial payment of their bill for the $150 received on July 5.

Unit # 5 – Revenue & Expense Accounts • Practice Makes Perfect! • Turn to Page 90 of your textbook and complete Questions 13-16 and Exercises 8-12.

Unit # 5 – Revenue & Expense Accounts • The Report Form Balance Sheet • Now this is the exact same thing as the Balance Sheet we have already learned except for one thing. • Normally we list like this: Assets on the LHS, Liabilities & Owners Equity on the RHS. • Now we list like this: • Assets • =Liabilities • + • Owners Equity

Unit # 5 – Revenue & Expense Accounts • The Owner’s Equity Account on the Balance Sheet! • RULE!!! ALWAYS Prepare the Income Statement before the Balance Sheet! • This is because as Revenue increases (or decreases) their will be a change in the Owner’s Equity section of the Balance Sheet (Net Worth of the Business)

Unit # 5 – Revenue & Expense Accounts • Page 85 Example: • C. Piccolo, Capital Oct. 1 $20,000 • Add: NI for October 3,000 • Less: C. Piccolo, Drws 1,000 • Increase in Capital 2,000 • C. Piccolo, Capital Oct. 31 $22,000

Unit # 5 – Revenue & Expense Accounts