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Chapter 5 Notes
Expanding the Ledger
Expanding the Ledger
Question:
What is the purpose of expanding the ledger?
Chapter 3-26
Debit / Dr. Credit / Cr.
E. Boa, CapitalE. Boa, Capital
20,000
5,000
2,000
23,000
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 SO 2 Define debits and credits and explain their use in recording business their use in recording business transactions.transactions.
Revenue and ExpenseRevenue and Expense
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
The owner’s withdrawals for personal use.
SO 2 Define debits and credits and explain SO 2 Define debits and credits and explain their use in recording business their use in recording business transactions.transactions.
Drawings Drawings
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
DrawingsDrawings
Question:
What do we use the Capital Account for now?
Accounts arranged in sequence in which they are presented in the financial statements.
Chart of AccountsChart of Accounts
SO 6 Explain what posting is and how it helps in the recording SO 6 Explain what posting is and how it helps in the recording process.process.
Hanshew Real Estate AgencyChart of Accounts
101 Cash 300 Common stock112 Accounts receivable 306 Retained earnings126 Supplies 350 Dividends130 Prepaid insurance
150 Office furniture158 Accumulated depreciation 400 Service revenue
200 Accounts payable 631 Supplies expense201 Notes payable 711 Depreciation expense209 Unearned revenue 722 Insurance expense212 Salaries payable 726 Salaries expense230 Interest payable 729 Rent expense
905 Interest expense
Liabilities
Assets Stockholders' Equity
Revenues
Expenses
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
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)
January DecemberProfitability
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?
GAAP – The Time Period Concept
Provides that accounting will take place over specific time periods known as fiscal periods.
January DecemberProfitability
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.
January DecemberProfitability
