3.1 - Expanding Equity

Question 1

Expanding the equity section for three new accounts

Answer 1

1. Revenues
2. Expenses
3. Drawings

Question 2

Revenues

Answer 2

related to the sale of goods and services

increase in equity

requires a credit entry, therefore revenue accounts are credited

Question 3

Expenses

Answer 3

costs related to revenue

decrease in equity

requires a debit entry, therefore expense accounts are debited

Question 4

Drawings

Answer 4

owner’s withdrawals for personal use

represent a decrease in equity

requires a debit entry, therefore drawing accounts are debited

Question 5

Why add these new accounts?

Answer 5

• Provide more info
• Help make decisions
• Be able to run the business profitable
• Allow you to see where money came and went

Question 6

Income statement

Answer 6

Financial statement that summarizes the items of revenue and expense, and shows the net INCOME or net LOSS of a business

Question 7

What does an income statement show?

Answer 7

Weather a business is profitable

Question 8

Revenue account names

Answer 8

they are generally given names that identify the source of the revenue

E.g. a loan company earns its money through the form of interest, therefore its revenue account will be called Interest Revenue

Question 9

Revenues

Answer 9

increase on the credit side
decrease on debit side

Question 10

The Revenue Recognition Convention (GAAP)

Answer 10

States that revenue must be recorded in the accounts (recognized) at the time the transaction is completed

Question 11

Net income

Answer 11

If revenues are greater than expenses, then the business has earned a NET INCOME

Question 12

Net loss

Answer 12

If expenses are greater than revenues, the business has suffered a NET LOSS