Unit 5 – Revenue and Expense Accounts
Key Concepts
• Analyze transactions that involve asset,
liability, owner’s equity, revenue, and expense
accounts
• Record the transactions in ledger accounts
• Prepare a report form balance sheet
• Prepare financial statements from a trial
balance
General Ledger
• Must contain all the accounts required to
prepare both financial statements: the
balance sheet and the income statement
Type of Account
Use
Asset
Liability
Owner’s equity
Preparation of balance sheet
Revenue
Expense
Preparation of income statement
- For each item in each type of account there is an account in the general ledger.
Review – Revenue Accounts
• Revenue – money or the promise of money
received from the sale of goods and services
• Examples
– Gym obtains revenue from members’ fees
– A real estate firm earns commissions from selling
houses
– Professionals such as lawyers, accountants, and
dentists earn fees from their clients for their services
• The different types of revenue earned determine
the number of revenue accounts necessary
Review Expense Accounts
• Expenses: the costs incurred to generate revenue
• A separate account is set up for each major type of
expense.
• Criteria to determine whether a separate account is
needed
(1) – frequency of usage
(2) – dollar value of expenditure
• Small expenditures that occur infrequently are normally
collected in an account together. (Miscellaneous)
Review – Debit/Credit for Balance
sheet Accounts
Assets
Debit
Credit
LHS
= Liabilities
Debit
=
Credit
RHS
+ Owner’s Equity
Debit
Credit
Revenue/Expenses & Owner’s Equity
Owner’s Equity
Debit
Credit
** Expenses decrease owner’s equity.
(recorded on the debit side)
** Revenue increases owner’s equity.
(recorded on credit side)
Summary – Revenue & Expense
Accounts
Expense Accounts
Debit
Credit
Expenses are recorded as debits because
expenses decrease equity.
Revenue Accounts
Debit
Credit
Revenue is recorded as a credit because
revenue increases equity.
Why create separate accounts for each type of
revenue and expense?
- To monitor which sources are contributing most to the company’s revenue, and
which ones may becoming too expensive for the company.
Review – Transaction analysis
• At least two accounts are involved in recording
every business transaction.
• Total debits = Total credits
(for each transaction)
The following examples will involve the 5 types of
accounts we have looked at: assets, liabilities,
owner’s equity, revenue, and expense.
Example 1
• Mar. 1 – Received $35 from a client for cutting
and styling hair.
Cash
Mar.1
35
Fees Earned (Revenue)
Mar.1
35
Example 2
• Mar. 5 – Billed P. Milne $75 for cut and style.
• Which accounts are involved?
Example 2
• Mar. 5 – Billed P. Milne $75 for cut and style.
Accounts Receivable
Mar.5
75
Fees Earned (Revenue)
Mar.1
Mar. 5
35
75
Example 3
• Mar. 10 – Paid $200 to Bell Canada for
telephone bill received today.
• Which accounts are involved?
Example 3
• Mar. 10 – Paid $200 to Bell Canada for
telephone bill received today.
Telephone Expense
Cash
Mar.1
35 Mar. 10
200
Mar. 10
200
Example 4
• Mar. 18 – Received a bill from the Barrie
Advance for $545 for advertising. The terms
of payment allow 30 days to pay. The bill will
be paid later.
• Which accounts are involved?
Example 4
• Mar. 18 – Received a bill from the Barrie
Advance for $545 for advertising. The terms
of payment allow 30 days to pay. The bill will
be paid later.
Accounts Payable
Mar. 18
Advertising Expense
545
Mar. 18
545
Example 5
• Mar. 23 – Paid $200 to the Barrie Advance as
partial payment of their bill received
previously.
• Which accounts are involved?
Example 5
• Mar. 23 – Paid $200 to the Barrie Advance as
partial payment of their bill received
previously.
Accounts Payable
Mar. 23
200
Mar. 18
Cash
545
Mar.1
35 Mar. 10
Mar. 23
200
200
More examples…
• Pages 79-81
– 6 more transactions.
The Drawings Account
• Records the withdrawal of money or other assets
from the business by the owner for personal use.
• This action
the value of the owner’s equity.
(similar to an expense transaction)
• Cannot be considered an expense, as this
withdrawal does not help to produce additional
revenue.
The Drawings Account Cont.
• Withdrawal of funds affects investment, the
Drawings account is an equity account.
• Owner’s equity section of the general ledger
• Normally has a debit balance
– Withdrawals decrease owner’s equity.
Examples – Drawings account
withdrawals
• Withdrawing cash
• Removing merchandise for personal use
• Taking the equipment from the business for
personal use
• Using company funds for personal expenses of
the owner of the owner’s family.
Examples – Drawings account
withdrawals
C. Piccolo, Drawings
Debit
Credit
** Withdrawals are recorded as debits because they decrease capital **
Example: On October 15, C. Piccolo, the owner, withdrew $1000 cash
from the business for personal use.
C. Piccolo, Drawings
Oct 15
1 000
Cash
Oct. 15
1 000
* The payment of wages or salaries to an owner must be recorded in the
Drawings account of income tax purposes. (not as an expense)
Summary – General Ledger
• See Figure 3.5 – Page 84 of your textbook
Equity Accounts on the Balance Sheet
• Income statement 1st
- the net income/loss affects the balance sheet
Owner’s capital account
- record of the owner’s investment in the business.
(owner’s claim against the assets)
if there is net income earned or if the owner
increases the assets of the business.
if there is a net loss or if the owner
withdraws assets from the business for personal use
Ex: 1- Capital increases when
withdrawals are less than net income:
Ex: 2 - Capital decreases when
withdrawals are greater than net
income:
Ex: 3 - Capital decreases when there is
a loss and the owner has withdrawn
assets:
Different Forms of the Balance Sheet
Account form – lists the assets on the LHS, and the
liabilities and owner’s equity on the RHS.
(what we have done up to now)
Report form – lists the assets, liabilities, and
owner’s equity vertically.
Assets = Liabilities + Owner’s Equity
(always applies)
Report Form
Balance Sheet
Example
Dollar Signs should be placed…
- Beside the first figure in each column
in both sections of the statement
- Beside the final total in both sections
of the statement
See Figure 3.9 – Page 87
Preparing Financial Statements from
the Trial Balance
Trial Balance
Income Statement
Balance Sheet
Activity.
• In pairs, use the trial balance on page 88 to
create the corresponding income statement
and balance sheet. Do this, without looking at
page 89.
• After you make an attempt, I will go over it
with you.
Goldman’s Gym
Income Statement
For the month ended October 31, 20 Revenue
Members’ Fees
Tanning Bed Rental
Towel Rental
Expenses
Salaries
Advertising
Telephone
Maintenance
License
Interest
Laundry
Net Income
$14 600
725
160
3 850
2 880
190
650
1 100
1 500
90
$15 485
10 260
$5 225
Goldman’s Gym
Balance Sheet
October 31, 20 Assets
$7 650
2 700
695
225 000
110 000
99 235
Cash
Accounts Receivable
Office Supplies
Land
Building
Training Equipment
Total Assets
$245 280
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
Bank Loan
Mortgage Payable
Total Liabilities
Owner’s Equity
R. Millar, Capital October 1
Add: Net Income for October
Less: R. Millar, Drawings
Increase in Capital
R. Millar, Capital October 31
Total Liabilities and Owner’s Equity
$11 600
63 000
80 000
$154 600
86 655
$5 225
1 200
4 025
90 680
$245 280