revenue and expense accounts working with income statements accounts

Revenue and Expense Revenue and Expense AccountsAccounts Working with Income Statements Accounts

Income Statement Income Statement AccountsAccounts

• 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:oThe balance sheet – asset, liability

and owners equity accountsoThe income statement – revenue and

expense accounts

Income Statement Income Statement AccountsAccounts

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

Income Statement Income Statement AccountsAccounts

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

Income Statement Income Statement AccountsAccounts

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

Rules of Debit and Credit Rules of Debit and Credit for Revenue and Expense for Revenue and Expense

Accounts Accounts

Assets = Liabilities + Owner’s EquityDebitIncrease

CreditDecrease

DebitDecrease

CreditIncrease

DebitDecrease

CreditIncrease

Rules of Debit and Credit Rules of Debit and Credit for Revenue and Expense for Revenue and Expense

Accounts Accounts

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

Rules of Debit and Credit Rules of Debit and Credit for Revenue and Expense for Revenue and Expense

Accounts Accounts Owner’s Equity

DebitDecrease

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

Rules of Debit and Credit Rules of Debit and Credit for Revenue and Expense for Revenue and Expense

Accounts Accounts

• 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

ExamplesExamplesAsset 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

ExamplesExamplesAsset 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

ExamplesExamplesAsset 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

ExamplesExamplesExpense 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

ExamplesExamplesExpense 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

ExamplesExamplesLiability and Asset TransactionLiability and Asset TransactionPaid $100 to the Calgary Herald as partial

payment of their bill for $150 received on July 5Accounts Payable

July 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