Chapter 5 Book-keeping The Des For Expenses And Revenues

Book-keeping The double entry system for expenses and revenues

Chapter 5

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 2007

5-1

Learning Objective 1

Understand the concept of profit and loss by comparing revenues with expenses

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Learning Revenues and expenses

 Revenue Revenue means means the the sales sales value value of of goods goods and and services services that that have have been been supplied supplied to to customers. customers.  Expenses Expenses means means the the cost cost value value of of all all the the assets assets that that have have been been used used up up to to obtain obtain those those revenues. revenues.

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Learning calculating profit or loss

Expenses Expenses ££ 70.000 70.000

Revenues Revenues ££ 100.000 100.000

£100.000 £100.000 -- £70.000 £70.000 == Profit Profit of of ££ 30.000 30.000

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Learning calculating profit or loss

Expenses Expenses ££ 80.000 80.000

Revenues Revenues ££ 60.000 60.000

£60.000 £60.000--£80.000 £80.000== Loss Lossof of ££20.000 20.000

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Learning Objective 2

See the effects of profits and losses on capital and the relationship to the accounting system

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Learning the effect of profit and loss on capital

Capital = Assets – Liabilities Old capital + Profit = New capital or

Old capital – Loss = New capital

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma

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Learning Debit or Credit entry?

Debit

Credit

Expenses Losses Assets Drawings

Revenue Profits Liabilities Capital

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma

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Learning Objective 3

Understand why separate accounts are used for each type of expense and revenue

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Learning why separate Expense accounts for each type of expense In Instead steadof of one one Expense ExpenseAccount Account we weidentify identify specific specificareas areasof of aa firms firmsexpenditures: expenditures: --Rent; Rent; --Telephone; Telephone; --Salaries; Salaries;

--Postages; Postages; --Insurance; Insurance; --Motor Motorexpenses; expenses;

--Stationary; Stationary; --Wages. Wages. --Advertising; Advertising;

Each Eachexpense expenseabove aboveon onseparate separateaccount account Each EachExpense Expensedecreases decreasesthe theamount amountof ofCapital Capitalon onEnd EndBalance Balancesheet sheet

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma

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Learning why separate Revenue accounts for each type of expense In In stead stead of of one oneRevenue RevenueAccount Account we weidentify identify specific specificareas areasof of aafirms firmsrevenues: revenues: Rent Rentreceivable; receivable; Commission Commissionreceived; received; Bank Bankinterest interestreceived. received. Each Eachrevenue revenueabove aboveon onseparate separateaccount account

Each Eachrevenue revenueincreases increasesthe theamount amountof ofCapital Capital on onthe theEnd Endbalance balancesheet sheet

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Learning Objective 4

Be able to record expenses and revenues using double entry system

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Effect of transactions [1]

Example Example2: 2: Motor Motorexpenses expensesare are paid paidwith withaa cheque cheque for for £230 £230 Debit Motor expenses*

Capital

Bank (asset) is decreased

Credit

£230 £230

* As result this expense decreases the amount of Capital on End Balance sheet

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Effect of transactions [2]

Example Example4: 4: AAproprietor proprietor takes takes £50 £50 cash cashout out of of her her business business for for her her own ownuse use Debit Drawings

Capital

Cash (asset) decreases

Credit

£50 £50

* As result this decreases the amount of Capital on End Balance sheet

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Effect of transactions [3]

Example Example5: 5: On On55June Juneitit isis decided decided that that part part of of aa firm’s firm’spremises premises are are not not needed needed at at the themoment. moment. The Thefirm firmlets lets someone someone else elseuse use the thesurplus surplusspace spaceand and receives receivesrent rent at at of of £140 £140 by bycheque cheque Debit Bank (asset) is increased Rent received (revenue)*

Credit

£140 Capital

£140

* As result this increases the amount of Capital on End Balance sheet

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Learning Objective 5

Understand the term ‘drawings’, be able to record them and recognise the effects of drawings on capital

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Learning effect of drawing On Aug 25 2008:

Proprietor takes ₤500 cash out of her business for her own use

Effect

Action

1 Capital is decreased by £500 2 Cash is decreased by £500 Dr

Debit the drawings account ₤500 Credit the cash account ₤500 Cash account 2006 Aug 25 Drawings

Dr 2006 Aug 25 Cash

Drawings account

Cr ₤500 Cr

₤500

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End of Chapter 5: The double entry system for expenses and revenues

Wood/Robinson: Book-keeping and Accounts, 6e, © T. Sijtsma 2007

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