Income Expense Statement for Schools - PowerPoint by ozk10625

VIEWS: 10 PAGES: 51

Income Expense Statement for Schools document sample

More Info
									Chapter 5

    The Expanded
       Ledger:
  Revenue, Expense,
    and Drawings
                Created by D. Gilroy      1
            Heart Lake Secondary School
Expanding the
   Ledger

         Created by D. Gilroy      2
     Heart Lake Secondary School
   Expanding the Ledger
Through the first four chapters we have
 looked at the fundamental accounting
 equation …
 Assets = Liabilities + Owner’s Equity
This resulted in a single account for
 owner’s equity.
By “default”, what types of entries have
 you charged to owner’s equity?
                                       3
   Types of OE Entries?
1. Owner’s investment in the company.
2. Revenues from the sale of goods or
   by providing a service.
3. Expenses related to the operation of
   the business and the generation of
   revenues.
4. Drawings or owner’s withdrawals
   from the business for personal use.
                                    4
   Expanding the Ledger
 The focus of Chapter 5 is the
  specific identification and use of
  accounts to track …

   REVENUES
            EXPENSES
                      DRAWINGS         5
   Expanding the Ledger
 The purpose of expanding the ledger
  is to provide essential information
  about the progress of the business.
 This information is needed to assess
  the ongoing profitability of the
  company.
 What do we mean when we say a
  company is profitable or making a
  profit?
 What is meant by loss?           6
Example of Expanding the Ledger




What do we know about profitability of
 this firm in the month of January?
  Did they make a profit or a loss?7
Example of Expanding the Ledger
                 
                 How much was spent
                  on advertising?
                 
                 Are the wages fair?
                 
                 Is the rent too high?
                 
                 How much did the
                  owner withdraw from
                  the business?

What types of economic events can
we “speculate” impacted the owner’s
         equity account?
                                          8
Example of Expanding the Ledger




 Now … what can we determine
                      Owner’s Equity
about the profitability of this firm?
                        $26,137
                                   9
       Income Statement
 Some of the information from these
                      REVENUES
  new accounts will be used to
                             &
  prepare an Income Statement.
                      EXPENSES
 What do you think an Income
  Statement is?
                    An Income Statement
 What accounts do you think we
                   shows, in detail, whether
                  the business is profitable
  would use to prepare in Income
                   or not … it shows if the
  Statement?           company made a
                           profit or loss.
                                             10
 Note does
 What the
 Sample
 this show?
formatting    Income Statement




                            11
            Revenue
 What is revenue?
  Selling goods or services
   produces revenue.
 What impact does revenue have
  on equity?
  Revenue is an increase in equity
   resulting from the sale of goods or
   services in the usual course of
   business.                       12
            Revenue
 A company is paid $500 for
  services rendered.
  Before using revenue accounts:
   Dr. Cash                $500
      Cr. Owner’s Equity          $500
  Using revenue accounts:
   Dr. Cash                $500
      Cr. Revenue                 $500
                                    13
                     Revenue
 How do revenue accounts “behave”?
       Assets        =    Liabilities     + Owner’s Equity
     Debit Credit        Debit Credit        Debit Credit
      (DR)    (CR)       (DR)    (CR)         (DR)    (CR)
    Normal                      Normal               Normal
    Balance                     Balance              Balance


                                              Revenue
Revenue represents an increase              Debit Credit
                                     Is the “Normal
                                     Does Revenue
                                         (DR)   (CR)
      in equity.
An increase in equity requires a     Balance” of a
                                               Normal
                                          typically
             credit entry.        increase or Balance
                                                decrease
                                  Revenue a DR or CR?
Therefore, to book revenue, credit Owner’s Equity?
      the revenue account.
                                                               14
GAAP - Revenue Recognition
 The revenue recognition convention
states that revenue must be recorded
   in the accounts (i.e. recognized)
     at the time the transaction is
               completed.
What does this mean?
 Revenue is recorded when the bill is
 sent to the customer.
 For a cash transaction, revenue is
 recorded when the sale is complete and
 the cash is received.                15
           Expenses
 What is expenses?
  The costs associated with
   producing revenue.
 What impact do expenses have
  on equity?
  Expenses represent a decrease in
   equity resulting from the cost of
   producing revenue.
 Examples????
                                  16
           Expenses
 A company pays wages of $250.
  Before using expense accounts:
   Dr. Owner’s Equity     $250
      Cr. Cash                   $250
  Using expense accounts:
   Dr. Wages Expense      $250
      Cr. Cash                   $250

                                   17
                     Expenses
 How do expense accounts “behave”?
       Assets        =    Liabilities     + Owner’s Equity
     Debit Credit        Debit Credit        Debit Credit
      (DR)    (CR)       (DR)    (CR)         (DR)    (CR)
    Normal                      Normal               Normal
    Balance                     Balance              Balance


                                              Expenses
Expenses represent a decrease               Debit Credit
                                    Is the “Normal
                                     Do Expenses
                                        (DR)   (CR)
     in equity.
A decrease in equity requires a    Balance” of an
                                      Normal
                                         typically
                                      Balance
     debit entry.                increase or decrease
                                 Expense a DR or CR?
Therefore, expense accounts are Owner’s Equity?
     typically debited.
                                                               18
  Net Income or Net Loss
 Using the revenue and expense
  accounts, a business can determine
  if they have earned a net income
  (profit) or a net loss.
 Net Income is the difference between
  the total revenues and total
  expenses, where the revenues are
  greater than the expenses.
 A Net Loss is created if expenses are
  greater than the revenues.       19
            Drawings
 The owner usually looks to the
  profits of the business to provide a
  livelihood.
 In a healthy business, the owner is
  able to take funds (generated by
  profits) out of the business.
 These withdrawals of funds, by the
  owner, are known as Drawings and
  decrease equity.                  20
            Drawings
 Drawings are NOT expenses.
 They are not associated with
  producing revenue.
 Drawings have nothing to do with
  the determination of the net income
  or net loss.
 Cash is the most common item
  withdrawn by an owner for personal
  use.                            21
   Expanding the Ledger
There are four types of accounts in the
   equity section:
  1. Capital – this account will now contain
     only the equity figure at the beginning
     of the fiscal period plus new capital
     from the owner.
  2. Revenues – increases in equity
     resulting from the sale of goods or
     services. A revenue account normally
     has a credit balance.               22
 Expanding the Ledger
3. Expenses – decreases in equity
  resulting from the costs of the materials
  or services used to produce the
  revenue. An expense account normally
  has a debit balance.
4. Drawings – decreases in equity
  resulting from the owner’s personal
  withdrawals. A drawings account
  normally has a debit balance. Drawings
  are NOT a factor in calculating net
                                      23
  income or loss.
          Class / Homework
p. 127, Exercise 4:
Complete each statement with a DR or CR
a)   The Bank account normally has a ____ balance.
b)   A Revenue account normally has a ____ balance.
c)   An Expense account normally has a ____ balance.
d)   Paying a creditor involves a ____ entry to the creditor’s
     account.
e)   The Drawings account receives a ____ entry when the
     owner withdraws money for personal use.
f)   A lawyer gives a cash refund to a customer. The Bank
     account will receive a ____ entry and the Revenue
     account will receive a ____ entry.
g)   Supplies are bought on credit. The Supplies account
     will receive a ____ entry and the supplier’s account
     payable will receive a ____ entry.                  24
          Class / Homework
p. 127, Exercise 4 (continued):
Complete each statement with a DR or CR
h)   The Drawings account will not normally receive ____
     entries.
i)   An increase in equity can be thought of as a ____ to the
     Capital account.
j)   Net Income can be thought of as a ____ to the Capital
     account.
k)   Net Loss can be thought of as a ____ to the Capital
     account.
l)   The owner takes a computer from the business for his
     personal (permanent) use. The Drawings account will
     receive a ____ entry.

                                                       25
      Class / Homework
p. 124, Exercise 1:
   For each of the 10 transactions listed,
    identify if one of the equity accounts is
    affected & whether it would require a DR
    or CR entry.
p. 125, Exercise 2:
   For each of the 10 transactions listed,
    identify if one of the equity accounts is
    affected & whether it would require a DR
    or CR entry.                         26
      Class / Homework
p. 126, Exercise 3:
   Use chart (see handout) to complete.
p. 127, Exercise 5:
   Use chart (see handout) to complete.



NOTE: if you don’t have the handout,
  you can prepare your own chart to
  analyze the stated transactions.     27
Exercise 3 (page 126)




                        28
Exercise 5 (page 127)




                        29
   The
 Income
Statement

       Created by D. Gilroy      30
   Heart Lake Secondary School
   The Income Statement
 The income statement tells the
  owners and the managers how the
  business is doing.
 By definition, an income statement
  is a financial statement that
  summarizes the items of revenue
  and expense, and shows the net
  income or net loss of a business for
  a given period of time.
                                   31
      The word
  “expense” is not
  always required.
        Why?
        Date?
 In what order are
  The accounting
 expenses listed?
 period for which
  the figures have
been accumulated
  A company can
  have more than
   one source of
 Net Income is not
      revenue.
   cash. It is the
     difference
   between total
revenues and total
     expenses.
                     32
  The Income Statement
 Who uses the Income Statement?
 1. Owners and Managers
    Shows if the business is making profit.
    Used for setting goals and policy.
    When compared to previous years, it
     provides a trend … highlighting potential
     problems.
 2. Bankers
    Supports loan decisions.
    Past profitability is one indicator of future
                                               33
     potential.
  The Income Statement
 Who uses the Income Statement?
 3. Income Tax Authorities
    Every business is required by law to
     prepare an income statement.
    The net income figure of a proprietorship
     must be included on the owner’s income
     tax return.
    Corporations must file their own tax
     returns.
    The income statement must be sent to the
     government along with the tax returns.34
         Fiscal Period
 Net income is measured over a
  specific length of time, known as the
  fiscal period.
 The formal fiscal period is typically
  one year.
 The fiscal year does not have to be
  the calendar year … it just has to
  run for 12 consecutive months (or in
  some cases, 52 consecutive weeks) 35
      Accounting Period
 The text indicates that the fiscal period is
  sometimes referred to as the accounting
  period.
 Companies prepare financial statements
  periodically in order to assess their
  financial condition and operating results.
  Accounting periods are typically one
  month, one quarter, or one year.
 If a company uses a one year accounting
  period (i.e. they only prepare financial
  statements at year end) it is referred to
  as their fiscal period or fiscal year.  36
           GAAP
  The Time Period Concept
  The time period concept provides
 that accounting will take place over
specific time periods known as fiscal
               periods.
What does this mean?
 Companies must use fiscal periods of
 equal length when measuring financial
 progress.

                                    37
            GAAP
     The Matching Principle
 The matching principle states that
each expense item related to revenue
earned must be recorded in the same
period as the revenue it helped earn.
What does this mean?
  Expenses must be recorded in the
  period in which the revenue is
  recognized.
  To do this, accountants make a
  number of mathematical adjustments in
  the accounts at the end of a fiscal year.
                                         38
  (we cover this in detail in Chapter 9)
        Chart of Accounts
 To help organize the expanded ledger, it
  is customary to number the accounts in
  the ledger. These numbers are used for
  identification and reference, particularly
  in computer systems.
 We will be using a computer system,
  Simply Accounting, later in the semester.
  The chart of accounts used by Simply
  Accounting is:
       Assets               1000 – 1999
       Liabilities          2000 – 2999
       Capital & Drawings   3000 – 3999
       Revenue              4000 – 4999   39
       Expenses             5000 – 5999
      Expanded Basis Equation and
          Debit / Credit Rules
Assets      =   Liabilities
                              +          Owner’s Equity


                                  Owner’s           Owner’s
Assets
            =   Liabilities
                              +   Capital     -     Drawings
Dr.   Cr.       Dr.   Cr.         Dr.   Cr.         Dr.   Cr.




                                   +    Revenues
                                                     -    Expenses

                                        Dr.   Cr.         Dr.    Cr.
                                                                40
         Class / Homework
p. 134, Exercise 1:
1)   Identify the errors.
2)   Prepare corrected
     income statement.




                            41
       Class / Homework
p. 134, Exercise 2:
A. Prepare a trial balance.
B. Prepare a chart of accounts based on
   the Simply Accounting numbering
   system in this lesson.
C. Prepare an income statement.

p. 135, Exercise 5:
Do all parts of this question … including
   the questions about GAAP.


                                          42
    Equity
Relationship
    and the
Balance Sheet
         Created by D. Gilroy      43
     Heart Lake Secondary School
                                                    Beginning
                                                     Capital
                                                     $21,878

                                      Drawings
                                       $3,950                         Ending
                                                                      Capital
                                                                      $26,137
                                                                      (Beg + Inc)
                              Total
                            Income                   Increase
                            $23,660                  in Equity
                                                      $4,259
                                                    (NI – Drawings)


                                        Net
                                      Income
                                       $8,209
                                      (Rev – Exp)




                             Total
                           Expenses
                            $15,451




Beginning    Net      Net               Ending
                             Drawings
 Capital + Income -- Loss --          = Capital
                                           44
 $21,878    $8,209   $n/a     $3,950    $26,137
   For this balance
 The equity section clearly
 describes what happened
 sheet, the ASSETS
      during the month
section is placed on of
       top Eve
 January.of the Boa started
   LIABILITIES and
  the month with a $21,878
EQUITY sections … Since
claim on the assets.
  instead of beside
the Net Income was greater
     than her format
 them. Thisdrawings by
    referred to as the
is$4,259, her claim on the
      assets increased
 report form of the to
           $26,137.
    balance sheet.




                              45
       Class / Homework
p. 140, Exercise 1:
Write out, in words & numbers, how you
   solved for the unknown.

p. 140, Exercise 2:
Write out, in words & numbers, how you
   solved for the unknown.

p. 140, Exercise 3:
Prepare the equity section of the balance
   sheet as per the example on slide 43
   (which is also available on page 138).
                                            46
Class / Homework




                   47
Class / Homework




                   48
          Class / Homework
Exercise 3, Page 140




                             49
       Class / Homework
p. 146, Use Your Knowledge 1:
Write out, in words & numbers your
   solution to parts (A) & (B) and be
   prepared to discuss in class.
p. 147, Use Your Knowledge 3:
Discover / correct the errors in the income
   statement.




                                         50
            Assignment
p. 149, Comprehensive Exercise 7:
Prepare all the requirements as outlined in
   the text.
This assignment will be submitted for
   marks.




                                         51

								
To top