Chapter 5: Revenue,
Expense and Drawings
The Expanded Ledger
Expanding the Ledger

Any change in the equity of the business
was recorded in CAPITAL account, no
matter what caused the change

There are 3 new accounts that
affect owner’s equity.
Revenue
Expense
Drawings



Expanding the Ledger (cont)



Revenues: sale
of all goods
Expenses:
costs related to
the revenues
Drawings:
owner’s
withdrawals for
personal use
Purpose of Expanding the
System

These accounts
provide
essential
information
about the
progress of the
company


Income
Statement is
prepared with
the new
accounts
(Revenues and
Expenses)
Shows the
profitability of
the company
Purpose of Expanding (cont)


Revenue
increases the
equity of the
company
E.g.. Sales,
Fees Earned,
Revenue,
Commissions,
etc.
Expanding the Ledger


Expenses: costs
associated with
producing
revenue (always
decrease
equity)
E.g.. Wages
Expense,
Donations
Expense Etc.
Net Income / Loss



Revenue – Expenses = Net Income or
Net Loss
Net Income = Revenues > Expenses
Net Loss = Revenues < Expenses
GAAP Principles

Revenue
Recognition
principle:
states that
revenue must
be recorded in
accounts at the
time transaction
is complete


Matching
Principle:
Each expense
item related to
revenue earned
must be
recorded in the
same time
period as the
revenue it
helped earn
Drawings


The owner looks to the profits of the
business to provide a livelihood, the
owner will be able to take funds out
of the business on a regular basis,
these withdrawals are a decrease in
equity
Account used to record withdrawals
of the owner is Drawings
Equity Section Summary
CR Capital
Equity figure at
begin of fiscal
period
CR Revenues Sale of goods or
services
DR Expenses Costs of
materials or
services
DR Drawings Owner’s loss/
withdrawals