BAF3M

Chapter 5: The
Expanded Ledger

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Lesson 5.1: Expanding the Ledger
with Income Statement Accounts

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Learning Goal…

By the end of this lesson, I

will be able to…

identify the accounts

found on an Income
Statement.

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 Let’s Practice…
What Accounts are Debited vs Credited

Received $200 The owner Paid $2500 for

cash from a invested $500 the salaries of the
customer for into the company. employees.
painting a sign.

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Expanding the Ledger: Capital Account

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 being Capital
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Chapter 4 vs Chapter 5
Question….

1. Why are we expanding the ledger?

2. What information might a business need to know
that can only be told from an expanded ledger?

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 Breakdown of Owner’s Equity “Capital”

1.Investments= Money being placed into the company, without

needing to be repaid.

2.Revenues = The sale of goods or by providing a service.

3.Expenses = The costs associated with operating a business.

We need to pay for these expenses to make revenue.

4.Drawings or owner’s withdrawals = An Asset removal by the

owner from the business for personal use. Typically, Cash.

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 Capital
1. Drawings 3. Investments

2. Expenses 4. Revenue

Drawings Expenses Revenue Investments

Due to the nature of these accounts, they will likely always

9 increase in a
transaction
 An Income statement is a financial report
that shows the revenue of the business and
subtracts its expenses to reveal the profit (or
loss) made for a given period of time.
What is an
Income Revenue - Expenses = Net Income (or Net Loss)

Statement?
Note:
• Revenue > Expenses…Net Income = Profit
• Revenue< Expenses…Net Loss= Profit (loss)

What does Profit mean?

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 The Expanded Ledger

The income statement consists of all revenue and expense accounts,

which are part of the expanded ledger.

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New Accounts:

Revenue: (increases equity from the sale of goods or services)

• Rental revenue
• Fees Earned
• Royalties etc.

Expenses: (decrease in equity resulting from the costs of operating a

business)
• Rent Expenses
• Delivery Expense
• Insurance Expense
• Bank Charges

Net Income or Net Loss:

• The difference between total revenue and total expenses. If the revenue is
greater than expenses, it is a Net Income. If expenses are greater than revenue,
it is a Net Loss.
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 On One Note, Complete the
Worksheet… provided worksheet

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Homework…
Complete pg. 164/165 Question #1

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Lesson 2: Creating the Income
Statement

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Learning Goal…
By the end of this lesson, I will be able to
create an Income Statement.

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 Minds On…
1. What is a Revenue Account?
2. What is an Expense Account?
3. What is a Drawings Account?
4. What is an Investment Account?
5. What is the purpose of an Income Statement?
6. What is the formula used on an Income
Statement?
7. Revenue > Expenses represents a…
8. Revenue < Expenses represents a…
9. A Revenue account is increased by …
10. A Expense account is increased by….

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Revenue – Expenses = Net Profit or (Loss)

Totals Column
WHO
WHAT
WHEN January 31, 20-

REVENUE

EXPENSES

Income Statement
Sample: 1 Revenue
Account and a
Net Income 18
Calculation Column
Income Statement Sample: 2 or more Revenue
Accounts and a Net Loss
Calculation
Totals Column
Column

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Practice…

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Updated Trial Balance Sheet
Order of Trial
Balance:

1. Assets
2. Liabilities
3. Capital
4. Drawings
5. Revenue
accounts
6. Expenses
accounts

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 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.
•The chart of accounts is a listing of all the accounts and their
account numbers.
•We will use the following for this course going up by 5s:
● Assets 105 – 195
● Liabilities 205 – 295
● Capital & Drawings 305 – 395
● Revenue 405 – 495
● Expenses 505 – 595 39
Chart of Accounts
 Closing Thoughts…

A REVENUE ACCOUNT IS AN EXPENSE ACCOUNT TO CALCULATE NET

INCREASED BY A…. IS DECREASED BY A…. INCOME OR NET LOSS
THE FORMULA IS…

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Homework…

Complete the Pg. 141 #3 & 4

following:

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Lesson 3: Equity Transactions and
Accounting Principles

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Learning Goal…

By the end of this lesson, I

will be able to …

Complete equity
transactions (revenue,
expenses, drawings).

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 Review…

What is the natural What is the natural What is the natural

balance for Revenue balance for Expense balance for Drawings
(Fees Earned) accounts? accounts? accounts?

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 Revenue
Recognition Requires revenue to be recorded in the
accounts at the time the transaction is
Principle: completed

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 Transaction 1: Eve Boa, a lawyer, draws
up a legal agreement for J. Basso, a client,
and for her services is paid a fee of $450
in cash.

Revenue What would be the transactions?

Transactions
Transaction 2: Another legal service for
$700 was performed for B. Singh on
credit.
What would be the transaction?

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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.

Example: A business purchases $30 000 of advertising on

credit for a Boxing Day sale to be held on December 26th. The
fiscal year ends December 31st, but the bill is not paid until
January.
When would we record the advertising expense?

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 Example 1: Eve Boa writes a $3300
cheque for the monthly rent payment

Expense What would the transaction be?

Transactions
Example 2: Eve Boa receives the monthly
: utilities bill for $395 from Municipal Gas.
The bill is not paid immediately.

What would the transaction be?

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 Example 1: Eve Boa, the owner of
the business, withdraws $1975 for
her personal use.

What would the transaction be?

Drawings Example 2: Eve Boa purchases from

Kitchen Plus on account a new $85
Transactions: coffee maker through the business
for personal use.

What would the transaction be?

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Homework…

COMPLETE THE PG. 150 #1-4

FOLLOWING
QUESTIONS…
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Lesson 3: Equity Relationships and
the Balance Sheet

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Learning Goal…

By the end of this lesson, I

will be able to…

Create an expanded equity

section on the Balance
Sheet.
Review…

WHAT ACCOUNTS FALL UNDER HOW DO WE CALCULATE NET

THE EQUITY SECTION OF OUR INCOME OR NET LOSS? WHAT
BALANCE SHEET? DOES IT TELL US?

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 To find our Ending Capital
amount for the fiscal period
Goal… on the Balance Sheet

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Connecting Income
Statement to Balance Sheet
Our Income Statement is prepared before our Balance
Sheet…

This is due to the fact that we need to know our Net

Income or Net Loss. This amount is a key part of
calculating our Ending Capital found in our Owner’s
Equity section.

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Calculating Capital…
Up until this point we have calculated Capital by using
our accounting equation formula A=L + OE.

We will now be expanding our Owner’s Equity sections

by breaking down our Capital.

To calculate our ending Capital for our Balance Sheet,

we must complete the following 2 steps…

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Step 1…

Beginning Capital + or - Net Income/Net Loss

Beginning Capital = Our Capital value provided either at the beginning

of the month or from last years fiscal period balance sheet

Net Income = Found on our Income Statement

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 Step 2A… Ending Capital with Net Income

Opening Capital + (Net Income – Drawings) =

Ending Capital

Drawings= Money that has been removed from the business by the
owner for personal use

Net Income = Revenue > Expenses

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Step 2B… Ending Capital with Net Loss

Opening Capital – (Net Loss + Drawings) =

Ending Capital

Net Loss = Revenue < Expenses

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 Example ….

Example Opening Net Income or Drawings Ending Capital

Capital Net Loss (-)

1) $65 000 (6 000) 2 000

2) 90 000 4 000 76 000

3) 14 000 10 000 12 000

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 Example ….

Example Opening Net Income or Drawings Ending Capital

Capital Net Loss (-)

1) $65 000 (6 000) 2 000 $57 000

2) 90 000 4 000 18 000 76 000

3) 8 000 14 000 10 000 12 000

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The Expanded Ledger

Asset and liability accounts remain unchanged.

Figure 5.1: Eva Boa’s Balance Sheet

Calculation Totals Carry Over Calculation Totals

46 Column Column Column Column Column
The Expanded Ledger

The new calculation looks at beginning capital, plus net

income, less drawings, plus increase in capital.
Figure 5.1: Eva Boa’s Balance Sheet

Calculation Totals Carry Over Calculation Totals

Column Column Column
47 Column Column
Homework…

COMPLETE THE PG. 157 #1-3

FOLLOWING…

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