CHAPTER 2 TOPIC 2
EXPANDED ACCOUNTING EQUATION
TERMINOLOGY
 Revenue and Expense Transactions:
 financial events that determine the profit (or loss) of a business.
 Goods
 Sales (the main source of revenue for firms that sell goods)
 Services
 commissions (the fees a business charges for buying or selling goods, for example,
real estate, for clients)
 Accounts Receivable
 an asset representing amounts due from customers (promise to pay)
TERMINOLOGY
REVENUE (always increases OE)
 Inflow of assets through the sale of goods
or services
 EX: commissions, fees earned, etc.
EXPENSES (always decreases OE)
 Cost of doing business to increase
revenue.
 EX: telephone expense, utilities expense,
advertising expense, insurance expense
NET INCOME
 Excess of revenue over expenses
 Profitable
NET LOSS
 Excess of expenses over revenue
 Not profitable
GAAPS
 When is revenue recognized? (when the transaction takes place or
when you receive money)
 When is expense recognized? (when the transaction has incurred or
when you have paid for the expense)
 What do you compare to figure out if you made a profit or not?(which
accounts and for which time periods)
GAAP
 Revenue Principle
 Revenue must be recognized as at the time of the sale of
goods, or as at the time of the rendering of services.
 Defines revenue, measures revenue, and recognizes revenue.
 Expense Principle
 Expenses must be recognized and recorded when they are
incurred.
 Defines expense, measures expense, and recognizes expense.
GAAP
 After accounting for revenue and expense transactions for a definite period of time, say one
month, you must subtract the total expenses incurred from the total revenue earned to
calculate the profit or loss for the period.
 Matching Principle
 Revenue and expenses must be correlated to report the net income (net loss) for an
accounting period.
 Example: January revenue is matched with January expenses to find profit/loss.
 Non-Example: January – March revenue is matched with expenses for January – February.
 Examples: page 40-41
TRANSACTION 1
 As at December 31, C. Leport Real Estate has received $26 000 in cash,
referred to commissions (revenue), for buying and selling homes, land
and other forms of real estate for clients.
 What two accounts are affected?
 Increase or decrease?
ANSWER 1
 Cash – increases by $26 000
 Commissions/Revenue – increases by $26 000
TRANSACTION 2
 As of December 1, C. Leport earned commissions (revenue) on credit by providing
real estate services as follows:
 $6000 for selling a house for Pat Rogers
 $4000 for selling a residence for. Scobie
 $15 000 for buying properties for Shannon Development
 All customers have 30 days to pay.
 What does this mean?
 Revenue was earned, however, cash was not received but a promise to pay at a
later date – which means accounts receivable was affected.
ANSWER 2
 Commissions Earned (revenue) – increases by $25 000
 Accounts Receivable/Pat – increases by $6000
 Accounts Receivable/Scobie – increases by $4000
 Accounts Receivable/Shannon Development – increases by $15 000
 The accounting equation should still balance!
TRANSACTION 3
 On December 31, C. Leport Real Estate receives a bill for $3000 from the
Leader Post for running three advertisements at different times throughout
the month of December. C. Leport has thirty days to pay.
 What two accounts are affected?
 Are they increase or decreasing?
 Remember capital (owner investment) and revenue (inflow of assets from sale of
goods or services) – increases owner’s equity
 Remember drawings (withdrawal of assets for personal use) and expenses (cost of
doing business – used to help you operate) – decreases owner’s equity
ANSWER 3
 Advertising Expense – decrease
 Account Payable/Leader Post - increase
MORE EXAMPLES
 Topic 2 page 33 – 39
 Matching Principle Explained page 40 - 41
TOPIC 2 ASSIGNMENT
 Chapter Questions
 Problem 2-4 and 2-5