Expanding the Ledger

The Income Statement Accounts

BAF3M - Chapter 2

Mr. R. Kotecha (2009) Ontario Educational Assistance Bank (2009)

Income Statement

In Unit 2, we learned about the ledger (t-accounts) and the effects transactions have on its accounts. The ledger can be taken to a higher level explaining the capital account in more detail. Now we are going to learn about 3 new accounts:

1.

2.

3.

These accounts will provide the owner with more detail about how the business has performed.

Income Statement

Remember the following from the last chapter:

Revenue, Expenses & Drawings

Up until now, we have been making changes to the ______________ in the _______________ section of the balance sheet

Here are a few examples that we have encountered (follow along by completing the T-charts for the accounts that have been affected:

Transaction #1

The company performs a service for a customer who pays cash ($3000)

Record which is the debit and credit

Transaction #2

The company performs a service ($1000) for a customer on credit

Record which is the debit and credit

Transaction #3

The company pays the workers’ salaries (wages) with the use of cash (total paid = $2200)

Record which is the debit and credit

Transaction #4

The company receives a phone bill ($150) that hasn’t been paid yet

Record which is the debit and credit

Transaction #5

The owner withdraws cash ($1000) from the company for personal use

Record which is the debit and credit

The Capital Account

What does the Capital Account look like? (What is the final balance?)

It is easy to see what has happened here, but very unclear to what transactions specifically happened

The Capital Account

In order to better explain the Capital account, we will introduce different accounts that better explain the specific transactions that affects the account

Each of the new accounts reflects a particular kind of transaction that affects the OE:

They are either a ________, _________, or _________

Revenues

Revenue:ex. Service revenues, fee’s earned, commissions earned, interest revenue, royalties earned, etc.

Remember: since revenues _________ the capital account, their balance will ______________

Rules for Revenue:

Revenues & Gap

The Revenue Recognition Principle:

Expenses

Expenses:

Ex. Advertising Expense, Utilities Expense, Wages Expense, Telephone Expense, Property Tax expense

Remember: since expenses decrease the capital account, their balance will be have a

_________________________

Rules for Expenses:

Drawings

Drawings are the

Remember: since drawings _________ the capital account, their balance will be have a ___________

Rules for Drawings:

What is the Purpose?

The Purpose of expanding the system are to:

1.

2.

Transaction #1

The company performs a service for a customer who pays cash ($3000)

Record which is the debit and credit

Transaction #2

The company performs a service ($1000) for a customer on credit

Record which is the debit and credit

Transaction #3

The company pays the workers’ salaries (wages) with the use of cash (total paid = $2200)

Record which is the debit and credit

Transaction #4

The company receives a phone bill ($150) that hasn’t been paid yet

Record which is the debit and credit

Transaction #5

The owner withdraws cash ($1000) from the company for personal use

Record which is the debit and credit

Comparing the Two Methods

Notes: