working with income statements accounts. revenue and expense data is needed to prepare an income...
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Working with Income Statements Accounts
Revenue and expense data is needed to prepare an income statement for an accounting period
A company’s general ledger must contain all the accounts required to prepare both financial statements:◦The balance sheet – asset, liability and owners equity accounts
◦The income statement – revenue and expense accounts
Revenue AccountsRevenue Accounts Revenue is the proceeds
from the sale of goods or services
A separate revenue account is set up for each distinct type of revenue earnedExamples:Examples: Membership fees, credit sales, cash sales
Expense AccountsExpense Accounts Expenses are the costs
incurred to generate revenue
A separate expense account is set up for each distinct type of major expense
The number of accounts will vary from business to business
Expense AccountsExpense Accounts Consider the following when creating
expense accounts in the general ledger:
1. Frequency of usage 2. Dollar value of the expenditure
Examples:Examples: Rent Expense, Advertising Expense, Salaries Expense
Small infrequent expenses will be recorded as Miscellaneous Expense or General Expense
Assets = Liabilities + Owner’s EquityDebitIncrease
CreditDecrease
DebitDecrease
CreditIncrease
DebitDecrease
CreditIncrease
Owner’s EquityDebitDecrease
Expenses decrease Owner’s Equity Expenses are recorded on the debit side
CreditIncrease
Revenue increases Owner’s EquityRevenue is recorded on the credit side
Owner’s EquityDebitDecrease
CreditIncrease
Expense AccountsDebitDecrease
Expenses are recorded as debits because expenses decrease equity
CreditIncrease
Revenue AccountsDebitDecrease
CreditIncrease
Revenue is recorded as a
credit because revenue
increases equity
Separate accounts for revenues and expenses show which sources of revenue are contributing the most to the company’s total revenue and which expenses are increasing too rapidly
Remember accounting procedures are to help managers make decisions
Asset and Revenue TransactionAsset and Revenue Transaction Received $175 cash from a client drawing up a
new will
CashJuly 1 175
Fees EarnedJuly 1 175
Transaction Date
Account Affected Type of AccountIncrease/ Decrease
Debit/CreditTransaction
Amount
July 1Cash Asset Increase Debit $175
Fees Earned Revenue Increase Credit $175
Asset and Revenue TransactionAsset and Revenue Transaction Billed client $1200 for legal services to close
purchase of home
Accounts ReceivableJuly 2 1200
Fees EarnedJuly 1 175July 2 1200
Transaction Date
Account Affected Type of AccountIncrease/ Decrease
Debit/CreditTransaction
Amount
July 2Accounts Receivable Asset Increase Debit $1200
Fees Earned Revenue Increase Credit $1200
Asset and Asset TransactionAsset and Asset Transaction Received $600 from the client as partial payment
of $1200 billed on July 2
CashJuly 1 175July 3 600
Accounts ReceivableJuly 2 1200 July 3 600
Transaction Date
Account Affected Type of AccountIncrease/ Decrease
Debit/CreditTransaction
Amount
July 3Cash Asset Increase Debit $600
Accounts Receivable Asset Decrease Credit $600
Expense and Asset TransactionExpense and Asset Transaction
Paid $95 to Telus for telephone bill received today
Telephone ExpenseJuly 4 95
CashJuly 1 175July 3 600
July 4 95
Transaction Date
Account Affected Type of AccountIncrease/ Decrease
Debit/CreditTransaction
Amount
July 4Telephone Expense Expense Increase Debit $95
Cash Asset Decrease Credit $95
Expense and Liability TransactionExpense and Liability Transaction Received a bill from the Calgary Herald for $150 for
advertising. Terms of payment allow 30 days to pay. The bill will be paid later.
Advertising ExpenseJuly 5 150
Accounts PayableJuly 5 150
Transaction Date
Account Affected Type of AccountIncrease/ Decrease
Debit/CreditTransaction
Amount
July 5Advertising Expense Expense Increase Debit $150
Accounts Payable Liability Increase Credit $150
Liability and Asset TransactionLiability and Asset Transaction
Paid $100 to the Calgary Herald as partial payment of their bill for $150 received on July 5
Accounts PayableJuly 6 100 July 5 150
CashJuly 1 175July 3 600
July 4 95July 6 100
Transaction Date
Account Affected Type of AccountIncrease/ Decrease
Debit/CreditTransaction
Amount
July 6Accounts Payable Liability Decrease Debit $100
Cash Asset Decrease Credit $100