Notes for Chapter 3 Unit 5 Notes for Chapter 3 Unit 5 (part 2)(part 2)

Mrs. Joudrey

Owner’s Drawings AccountOwner’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:Example:

• The owner withdrew $1000 cash from the business for personal use.

• Record the T-account transactions in your notebook

Answer:Answer:

• Drawing’s – Owner’s Equity - (debit) $1000

• Cash – Asset - (credit) $1000

Drawings AccountDrawings Account

• Salaries paid to the owner are usually recorded in the drawings account.

Remember:Remember:

• Income Statement includes: revenues and expenses

• Balance Sheet includes: assets, liabilities and owner’s equity (including drawings in the OE section)

Trial BalanceTrial Balance

• A trial balance will include all of the accounts (revenues, expenses, assets, liabilities and owner’s equity)

In your Textbook: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 Equity Accounts on the Balance SheetBalance 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 Owner’s Equity Section on a Balance Sheet NowBalance 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: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:Answer:

Owner’s name, capital October 1 20 000 Add: Net Income for October 3 000 Less: Owner’s name Drawings 1 000 Increase in Capital 2 000 Owner’s name, capital October 31 22 000

Note how there are three columns that are used now.

Note what goes in each column.

Example: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:Answer:

Owner’s name, capital November 1 22 000 Add: Net Income for October 1 000 Less: Owner’s name Drawings 1 500 Decrease in Capital 500 Owner’s name, capital November 30 21 500

Example: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:Answer:

Owner’s name, capital December 1 21 500 Less: Net Loss for October 500 Less: Owner’s name Drawings 800 Decrease in Capital 1 300 Owner’s name, capital December 31 20 200

Balance SheetBalance 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 SheetBalance 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 88Open Your Books to Page 88

• Notice how the items are listed in a trial balance (balance sheet items then income statement items)

Page 89Page 89

• Notice how the income statement should look (you can have a line item for total revenue and total expense)

Page 89Page 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 RemindersGAAP Reminders

• What is the time-period principle?

GAAP RemindersGAAP Reminders

• Time-period principle - companies must use the same time period when preparing financial statements (example: monthly)

GAAP RemindersGAAP Reminders

• What is the matching principle?

GAAP RemindersGAAP 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 RemindersGAAP Reminders

• What is the accrual basis of accounting ?

GAAP RemindersGAAP 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).

AssignmentAssignment

• Please complete the following: • Questions 15-18 page 90• Exercises 9-17 starting on page 91