Notes for Chapter 3 Unit 5
(part 2)
Mrs. Joudrey
Owner’s Drawings Account
• People start up businesses to earn
a profit. Remember owners own the
business, so they can do what they
want with the profit of their
business. If they want to take
money or products (merchandise or
equipment) out of the business they
need to record these transactions in
the drawings account.
Example:
• The owner withdrew $1000 cash
from the business for personal use.
• Record the T-account transactions
in your notebook
Answer:
• Drawing’s – Owner’s Equity - (debit)
$1000
• Cash – Asset - (credit) $1000
Drawings Account
• Salaries paid to the owner are
usually recorded in the drawings
account.
Remember:
• Income Statement includes:
revenues and expenses
• Balance Sheet includes: assets,
liabilities and owner’s equity
(including drawings in the OE
section)
Trial Balance
• A trial balance will include all of the
accounts (revenues, expenses,
assets, liabilities and owner’s
equity)
In your Textbook:
• Look at the example of a general
ledger on page 84
• Note how the accounts are listed:
assets, liabilities, owner’s equity,
revenue, and expenses.
Equity Accounts on the
Balance Sheet
• Income statements must be
prepared before the balance sheet
because the net income or net loss
will now be recorded on the balance
sheet (as well we are now going to
record the drawings account on the
balance sheet)
Owner’s Equity Section on
a Balance Sheet Now
• Owner’s name, capital (first day of the fiscal
period example October 1)
• Add: Net Income OR Less: Net Loss for the
accounting period (example October)
• Less: Owner’s name, Drawings
• Increase or Decrease in Capital (this is
determined by taking the drawings away from
the net income (or let loss))
• Owner’s name, capital at the end of the
accounting period (example October 31) – This
is determined by combining the capital at the
beginning of the month and the increase or
decrease in capital.
Example:
• The business had a capital account
of $20 000 at the beginning of the
month, the net income at the end of
the month (found on the Income
statement) was $3 000, the
drawings account at the end of the
month was $1 000.
Answer:
Owner’s name, capital October 1
Add: Net Income for October
3 000
Less: Owner’s name Drawings
1 000
Increase in Capital
Owner’s name, capital October 31
20 000
2 000
Note how there are three columns that are used now.
Note what goes in each column.
22 000
Example:
• Please do this example in your
notebooks: the business had a
capital account of $22 000 at the
beginning of the month (Nov. 1), the
net income at the end of the month
(found on the Income statement)
was $1 000, the drawings account
at the end of the month was $1 500.
Answer:
Owner’s name, capital November 1
Add: Net Income for October
1 000
Less: Owner’s name Drawings
1 500
Decrease in Capital
Owner’s name, capital November 30
22 000
500
21 500
Example:
• Please do this example in your
notebooks: the business had a
capital account of $21 500 at the
beginning of the month (Dec. 1), the
net loss at the end of the month
(found on the Income statement)
was $500, the drawings account at
the end of the month was $800.
Answer:
Owner’s name, capital December 1
Less: Net Loss for October
500
Less: Owner’s name Drawings
800
Decrease in Capital
Owner’s name, capital December 31
21 500
1 300
20 200
Balance Sheet
• We are used to seeing the balance
sheet with the assets on the left
and the liabilities and owner’s
equity on the right hand side.
However, balance sheets are not
always recorded in this manner.
• Sometimes all accounts are listed
on the left side and the amounts on
the right.
Balance Sheet
• Regardless of the method we still
list the assets and liabilities the
same way as we are used to (sort
term assets according to liquidity –
how quickly it can be turned into
cash, long term assets – longest
useful life first) (liabilities –
according to what needs to be paid
first).
Open Your Books to Page
88
• Notice how the items are listed in a
trial balance (balance sheet items
then income statement items)
Page 89
• Notice how the income statement
should look (you can have a line
item for total revenue and total
expense)
Page 89
• Notice the new report form balance
sheet – the list of items and the two
columns for amount and totals (it is
different from the type we are used to
seeing – the account form balance sheet)
• Notice how the net income from the
income statement is recorded in the
balance sheet.
• Notice how the owner’s equity section
looks on the balance sheet
GAAP Reminders
• What is the time-period principle?
GAAP Reminders
• Time-period principle - companies
must use the same time period
when preparing financial
statements (example: monthly)
GAAP Reminders
• What is the matching principle?
GAAP Reminders
• Matching principle – the costs
recorded in the expense accounts
should be matched with the revenue
of the same accounting period to
determine net income.
GAAP Reminders
• What is the accrual basis of
accounting ?
GAAP Reminders
• Accrual basis of accounting –
records revenue when it is earned,
whether the revenue is in the form
of cash or on credit (accounts
receivable). Expenses are recorded
when incurred, whether those
expenses are paid for in cash or on
credit (accounts payable).
Assignment
• Please complete the following:
• Questions 15-18 page 90
• Exercises 9-17 starting on page 91