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Chapter 5

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Chapter 5

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  1. Chapter 5 The Expanded Ledger

  2. Capital Revenue Sell services Owner investments Need to Separate Capital Capital Owner invested $850 850  Sold $850 in services + Credit + Credit 5.1

  3. Drawings Owner takes out money Expenses Pay for things to run the business Need to Separate Capital Owner withdrew $100 Capital  100 Paid $100 in wages + Debit Spent $100 to repair car Lost $100 on sale of an asset + Debit 5.1

  4. Equity Accounts • Divide up Equity into 4 different types of accounts • Capital • Drawings • Revenue • Expenses • Helps us see what is happening • What’s coming in • Where money is going 5.1

  5. - - - - - + + + + + Assets = Liabilities + Equity Bank A/P Capital Drawings + + Loan A/R Revenue Expenses + + Supplies Expenses + 5.1

  6. Revenue • Record sale of goods and services • Increases Equity • Credit to increase • Usually business has One revenue account • Called: Fees earned, Revenue, Sales • Eg. Performed service for $50 on account • Debit A/R (Asset) • Credit Fees Earned (Revenue) 5.1

  7. GAAP – Revenue Recognition • Revenue must be recorded at the time the transaction is completed • When it is earned and bill is sent, not necessarily paid • May be divided into chunks for large projects • Make sure financial position is accurate • Examples: • Sold products on account – Record • Completed half of job – Record half of total amount • Gave customer a quote for a possible job – Not recorded 5.1

  8. Expenses • Costs associated with producing revenue • Rent, wages, advertising, utilities • Decrease in Equity • *Debit Expense Account* • Eg. Paid $200 in wages to employees • Debit Wages Expense (Expense) • Credit Cash (Asset) 5.1

  9. Drawings • Owner withdraws money from business • Decrease in Equity • *Debit Drawings Account* • Eg. Owner buys a computer on account for personal use • Debit Drawings (Equity) • Credit A/P (Liability) • Note it does not affect Net Income or Loss 5.1

  10. - - + + Assets = Liabilities + Equity Assets Liabilities Capital Drawings + + Revenue Expenses + + Drawings Expenses B I T Capital Revenue E D I T 5.1

  11. Net Income or Loss? • Calculated by subtracting the Expenses from the Revenue • If Revenue is greater than Expenses = Net Income • If Expenses are greater than Revenue = Net Loss • These two accounts, Revenue and Expenses, make up the Income Statement. 5.1

  12. 5.1 Homework • Page 124 (wb 55-59) • Exercises 1-5 • Questions 1-9 5.1

  13. The Income Statement • Financial Document that determines the Net Income or loss over a period of time • Heading • Who, What, When • When: For period ending on a date • List all Revenues and Total • List all Expenses and Total • Subtract Total Expenses from Revenue • Double underline final total • Net Income or Net Loss 5.2

  14. 5.2

  15. 5.2

  16. GAAP – Time Period Concept • Accounting will take place over specific periods of time, Fiscal Periods • Must be reasonable length for accuracy • Monthly, Quarterly, Yearly • Must be equal in length for comparison • Fiscal year is any consecutive 12 months • Income statement heading • For One Month Ending September 30, 2007 5.2

  17. GAAP – Matching Principle • Each expense item related to a revenue must be recorded in the same period as the revenue was earned • Match Expenses with Revenues • Same time period 5.2

  18. Chart of Accounts • Listing of all accounts • Number each account to help organize the ledger • Assets – 100 to 199 (or 1000-1999) • Liabilities – 200 to 299 (2000-2999) • Capital & Drawings 300-399 (3000-3999) • Revenues 400-499 (4000-4999) • Expenses 500-599 (5000-5999) 5.2

  19. Liquidity Alphabetical Maturity

  20. Trial Balance • List ALL accounts in Ledger order • As in Chart of Accounts • Record each account total • Usual Balances • Debit = Assets, Drawings & Expenses • Credit = Liabilities, Capital & Revenue • Total Debits = Total Credits 5.2

  21. Ledger Order 100s 200s 300s 400s 500s

  22. 5.2 Homework • Page 133 (wb59-65) • Exercises 1-5  1,2,&4 • Questions 1-13 5.2

  23. 5.3 • Effects of new equity accounts on the Balance sheet 5.3

  24. Text pg 137 5.3

  25. Equity Changes Beginning Capital Net Income Ending Capital - + = Drawings - Net Loss Revenue - Expenses - + = 3000 800 50 3750 eg1 - - = 5700 200 100 5400 eg2 - + = 2800 600 900 2500 eg3 5.3

  26. Effects on Balance Sheet • Need to show this change in Capital on the balance sheet • Identify if it’s an Increase or Decrease in Capital • Assets still have to equal Liabilities plus new Equity: A = L + E 5.3

  27. Report Form Balance Sheet Text pg. 138 5.3

  28. Drawings less than Net Income = Increase in Capital Notice dates show a fiscal period of 1 month 5.3

  29. = Decrease in Capital = Decrease in Capital 5.3

  30. Equations • BC + NI – D = EC • R-E=NI • NI-D = Change in Capital • BC + Change in Capital = EC 5.3

  31. 5.3 Homework • Page 139 (wb 65-67) • Exercises 1-3 • Questions 1-7 5.3

  32. Assignment • Create an Income Statement and Balance sheet • MUST USE PEN • Plan out you work on a separate paper • Follow the examples shown; • Income Statement, page 120 or 128 • Balance Sheet, page 138

  33. Homework • Chapter 5 Review pages 146-148 • Exercises 1-6 (wb 69-72)

  34. Homework • Chapter 5 Questions for Further Thought • Page 151 #1-14 (wb 76) • Test Tomorrow • Chapters 4 & 5