Lesson 11 - Revenues & Expenses Flashcards
Revenue is…
An increase in assets or reduction in liabilities that leads to an increase in owner’s equity (except for a capital contribution).
Expenses are…
Expense is a decrease in assets (or increase in liabilities) that reduces owner’s equity (except for Drawings)
Examples of revenues include…
Sales
Fees
Interest earned/received
Examples of expenses include…
Electricity
Interest on loan
Advertising
Rent
Inventory of supplies
Wages
Insurance
In the context of the Accounting Equation, an increase in Expenses will…
Decrease the amount of Owners Equity (as it will likely decrease Net Profit)
In the context of the Accounting Equation, an increase in Revenue will…
Increase the Owners Equity (as it will likely increase Net Profit)
When explaining expenses we use the terms…
“Consumed” or “Used Up”
T/f - Petrol is an expense.
True - Petrol is an expense as once it has been consumed there is no lasting benefit and therefore must be paid again.
T/f - Purchase of inventory is an expense.
False - Purchasing inventory will not impact the Owners Equity. It will lead to a decrease in bank and an increase in the value of inventory (both assets) - the lasting benefit will be realised when the inventory is sold/converted to cash.
T/f - A bakery selling off an old oven is a revenue.
False - selling off an old oven is not considered an “ordinary business activity”
E.g. A regular business activity for a bakery would be selling cakes, bread, etc.
Selling an old oven would be considered irregular and would only be recorded as a Cash Receipt.
T/f - Cash receipts will always be revenues.
False - An item can be a cash receipt BUT NOT a revenue.
T/f - A revenue will always be a cash receipt.
True - Any revenue item will also be a cash receipt.
T/f - An expense will always be a cash payment.
True - Any expense will also be recorded as a cash payment.
T/f - All cash payments are expenses.
False - not all cash payments are expenses. (e.g. Drawings, purchases of assets, etc.)
A cash payment will only be classified as an expense if it impacts the Owners Equity.
What is the link between Revenues & Expenses and Net Profit?
Net profit increases if:
Revenues increase
Expenses decrease
Net profit decreases it:
Revenues decrease
Expenses increase
