Our Current Owner’s Equity
Up until now we have been using a single account to recognize all the changes in owner’s equity
If we pay out money to pay something
If we receive money for a service
If the owner takes money out of the business
The problem with this is that when we go back to look at the ledger we cannot tell where the changes to OE came from
The Need to Expand
In order to more accurately measure our increases and decreases in equity we introduce three new types of accounts:
Revenue-which are related to the sales of goods and services
Expenses- which are the cost related to the revenue
Drawings- which are the owner’s withdrawals for personal use
These represent those ANWSER which were caused by when ANWSER
Example: We perform maintenance for a customer for $200 cash
Think about it..Revenue represents an increase in equity
An increase in equity requires a credit entry
Therefore, the Fees Earned (revenue) is ANWSER
GAAP - The Revenue Recognition Convention
The revenue recognition convention states that revenue must be recorded in the accounts at the time the transaction is completed
Usually this means we simply record revenue when the bill for it is sent to the customer. Not necessarily when we receive cash
Some businesses will perform services over multiple years and will therefore need to recognize this revenue over several periods
Now for Expenses
There are costs associated with producing revenues – wages, utilities, advertising, etc...
Example: We pay our secretary their regular weekly wage of $400 in cash
Once Again, Think About It
Expense represents a decrease in equity
A decrease in equity requires a debit entry
Therefore, the Wages Expense account is Debited
Net Income or Net Loss
By using these expense and revenue accounts we may find out if a business is profitable or if they are losing money
To find out the Net Profit or Net Loss of a business we simply...
If we calculate this number to be a negative number then it represents a net loss
Owner’s of businesses usually take out money from the business to provide themselves a livelihood
Example: We, the owner, take out $300 from the business for our personal use
Some Other Transactions Affecting Drawings...
The owner removes other assets, besides cash, for personal use
The owner collects a debt from a customer and keeps it for their personal use
Our New Equity Section
Capital: This will now only contain the equity figure at the beginning of the fiscal period plus any additional capital from the owner (invested)
Revenue: Increases in equity resulting from the sale of goods or services. Normally this will have a credit balance
Expenses: Decreases in equity resulting from the costs of the materials or services used to produce the revenue. Normally this will have a debit balance
Drawings: Decreases in equity resulting from the owner’ personal withdrawals. Normally this has a debit balance
Summary of All Our T-Accounts
The Income Statement - Reporting Our Revenues and Expenses
We have now learned how our Capital has been split apart into many new accounts
The income statement is a financial statement that summarizes the items of revenue & expense, & shows the net income or net loss of the business
We will now learn how to make an income statement...
The Income Statement, The Making Of...
Step 1 - As usual we start with our basic three line title. Except since we are now representing the revenues and expenses for a period in time we have to put a more suitable date...
BASLER AIR SERVICE(Who) Income Statement(What)
For the year ended December 31,2009(When)
Step 2 -We then list our revenues, if there is only one we simply put the number directly into the right hand column. IF there is more than one we put each, in alphabetical order, in the first column and total them into the second.
Step 3 - Next we skip a line and start listing our expenses,