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Slide Notes
Until now any change that affected the equity of the business was recorded in one account, no matter what caused the change.
In reality the ledger has a number of accounts within the equity section. Each of these accounts reflects a particular kind of transaction that affects owner’s equity.
In reality the ledger has a number of accounts within the equity section. Each of these accounts reflects a particular kind of transaction that affects owner’s equity.
Expanded Ledger
Published on Jan 14, 2019
New ledger accounts are introduced and the rules of the debit/credit system are expanded.
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PRESENTATION OUTLINE
Expanded Ledger
David Dickinson
Until now any change that affected the equity of the business was recorded in one account, no matter what caused the change.
In reality the ledger has a number of accounts within the equity section. Each of these accounts reflects a particular kind of transaction that affects owner’s equity.
In reality the ledger has a number of accounts within the equity section. Each of these accounts reflects a particular kind of transaction that affects owner’s equity.
Photo by Artem Bali
The New Accounts that affect equity
- Revenue
- Expenses
- Drawings
Remember that a ledger is simply a group of accounts
Each of the new accounts reflects a particular kind of transaction that affects owner’s equity. In the expanded equity section you will see the following:
Revenue = Related to the sale of goods or services
Expenses = Which are costs related to revenues
Drawings = The owner’s withdrawals for personal use.
Each of the new accounts reflects a particular kind of transaction that affects owner’s equity. In the expanded equity section you will see the following:
Revenue = Related to the sale of goods or services
Expenses = Which are costs related to revenues
Drawings = The owner’s withdrawals for personal use.
Photo by Aidan Bartos
Untitled Slide
A ledger of accounts might now look like this.
The Capital Account will now contain only the equity figure at the beginning of the fiscal period and any new capital investment from the owner if any.
The Capital Account will now contain only the equity figure at the beginning of the fiscal period and any new capital investment from the owner if any.
But Why? I liked the old system
- The new system provides essential information to allow for decision making such as
- How much money was made last month?
- How much is being spent on general supplies?
- Were any expenses out of the ordinary?
- How much money was withdrawn from the business?
The new accounts of the equity section of the ledger have one main purpose and that is to provide essential information about the progress of the business.
This information is needed by the managers and owners to see if the business is being run profitably and to help them make sound decisions.
In past with just the capital account it would be difficult and in some cases impossible to figure out the answers to the questions on the slide without going back through all of the transactions.
You must become familiar with a ledger that has a number of accounts in an equity section. These accounts are used to gather the amounts that cause equity to change.
This information is needed by the managers and owners to see if the business is being run profitably and to help them make sound decisions.
In past with just the capital account it would be difficult and in some cases impossible to figure out the answers to the questions on the slide without going back through all of the transactions.
You must become familiar with a ledger that has a number of accounts in an equity section. These accounts are used to gather the amounts that cause equity to change.
Photo by national museum of american history
Revenue
- An increase in equity resulting from the sale of goods or services.
- An increase in equity results in a credit entry
- A business may have one or multiple revenue accounts, which are titled appropriately based on the source of the revenue.
Revenue represents an increase in equity. An increase in equity requires a credit entry
Therefore, the “ revenue account” is credited”
Some businesses may have more than one revenue account depending on the various aspects of their business.
Example:
Canadian tire
-> Mechanic Shop
-> Service Revenue
-> Store Sales Revenue
Example names for revenue:
Fees Earned, Sales Revenue, Royalties.
Therefore, the “ revenue account” is credited”
Some businesses may have more than one revenue account depending on the various aspects of their business.
Example:
Canadian tire
-> Mechanic Shop
-> Service Revenue
-> Store Sales Revenue
Example names for revenue:
Fees Earned, Sales Revenue, Royalties.
Photo by Harald Felgner
Accounting Standards - Revenue Recognition
- Revenue must be recorded in the accounts (recognized) at the time the transaction is completed.
- Question:
- How does this work for companies that engage in projects which may take several years to complete?
This means that revenue is recognized when the bill is sent (so for on credit accounts we recognize the revenue before we actually receive the money).
Answer to Slide Question:
It doesn’t. The company does not wait until the project is entirely completed before it sends its bill. Periodically, it bills for the amount of work completed and receives payments as the work progresses. Revenue is taken into the accounts on this periodic basis.
Answer to Slide Question:
It doesn’t. The company does not wait until the project is entirely completed before it sends its bill. Periodically, it bills for the amount of work completed and receives payments as the work progresses. Revenue is taken into the accounts on this periodic basis.
Photo by Thomas Charters
Expenses
- Expenses are the costs, which are incurred with generating revenue.
- There may be many expense accounts in a business each representing a specific type of decrease in equity.
- examples:
- Advertising, wages, fuel, rent, raw materials
The word expense is not always included in the account title where there is no doubt that the item is an expense.
Not all expenditures are for expenses.
Example: the purchase of equipment would be debited to an asset account.
It is from the revenue and expense accounts that a business can tell whether or not it has earned a net income (or profit)
Net income is the difference between the total revenues and the total expenses. (Net loss occurs when revenue is less than expenses)
Not all expenditures are for expenses.
Example: the purchase of equipment would be debited to an asset account.
It is from the revenue and expense accounts that a business can tell whether or not it has earned a net income (or profit)
Net income is the difference between the total revenues and the total expenses. (Net loss occurs when revenue is less than expenses)
Drawings
- A withdrawal of funds by the owner.
- These represent a decrease in the equity of the business.
- Drawings are not expenses. They do not influence the calculation of net income or loss.
The owner of a business usually makes a livelihood from the profits that his or her business generates.
The owner will be able to take these generated funds out of the business much like a salary.
The owner will be able to take these generated funds out of the business much like a salary.
Photo by Dominique Godbout
