Professional Documents
Culture Documents
Prepared by:
Raza Saeed,
FCMA, MBA, ACIS, CIA, DAIBP
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Learning Objectives
After studying this chapter, you should be able to
• Explain the nature of income, revenue and expenses.
• Apply the realization and matching principles in recording
revenue and expenses.
• Apply the rule of debit and credit in recording revenue and
expenses.
• Define and record depreciation expense
• Describe and prepare Income Statement and Owners Equity
Statement and related them with Balance Sheet
• Explain the purpose served by the closing entries
• Distinguish between accrual and cash basis of accounting
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Net Income
• Basic Objective of any business:
• An increase in Owner’s Equity resulting from profitable operation of
the business
• An income statement which summarize the profitability of
the business entity over a period if time.
Income Statement
Robert Real Estate Company
Income Statement
For the month ended October 31, 20------
Revenue
Sales Commissions earned $10, 640
Expenses
Advertising Expenses $630
Salaries Expenses 7,100
Telephone Expenses 144
Depreciation Expenses - Buildings 150
Depreciation Expenses – Office Equipment 45 8,069
Net Income $2,571
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Revenue
The price of goods and services rendered during a given
accounting period
Gross increase in owner’s equity resulting from operation
of the business
Realization principle:
Record revenue at the time services are rendered to the
customers or
Goods sold are delivered to customers
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Expenses
• Expenses are the costs of the goods and the services
used up in the process of earning revenue.
• Expenses always cause decrease in owner’s equity
• Matching principle:
• In measuring net income for a period, revenue should be offset by
all the expenses incurred in producing that revenue.
• Offsetting expenses against revenue on the basis of “cause and
effect”
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• Transaction – a
• October 1, Paid $360 for publication of advertising
describing various houses offered for sale
• Transaction – b
• October 6, Earned and collected commission of $ 2,250
by selling residence previously listed by a client.
• Transaction – C
• October 16, Newspaper advertising was purchased at a
price of $270, payment to be made within 30 days.
• Transaction – d
• October 20, A commission of $ 8,390 was earned by
selling a client’s residence. The sale agreement
provided that commission would be received within 60
days.
Analysis Rule Entry
The asset in the form of Increase in assets are Debit : Accounts Receivable.
Accounts Receivable was recorded by debits $ 8,390
acquired.
Revenue was earned Revenue increase owners Credit : Sales Commission earned
equity and are recorded by $8,390
Credits'
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• Transaction – e
• October 25, Roberts withdrew $2,800 for personal use.
• Transaction – f
• October 30, Roberts found that he did not need all of
$2,800 withdrawn on October 25, and he re-deposited
$1,000 of this amount in the company’s bank account.
Deposit of owner increases increase in Owner 'Equity are Credit : James Roberts, Capital
the Owner’s Equity recorded by credits $1,000
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• Transaction – g
• October 31, Paid Salaries of $ 7,100 to employees for
services rendered during the month of October.
• Transaction – h
• October 31, A telephone bill for October amounting to
$ 144 was received. Payment was required by
November 10.
Analysis Rule Entry
The cost of telephone services Expenses decrease Debit : Telephone Expense. $ 144
is an expense. owners equity and are
recorded by debits
Account Payable, a liability, Increase in liabilities Credit : Accounts Payable $ 144
was incurred are recorded by
Credits'
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3 141,000 39,000
5 15,000 24,000
20 1,500 25,500
30 3,000 22,500
6 2,250 24,390
25 2,800 21,590
30 1,000 22,590
31 7,100 15,490
19
20 1,500 9,500
Land Account # 20
Date Explanation Ref Debit Credit Balance
20----
10 11,000 130,000
20
14 5,400 26,400
30 3,000 23,400
31 2 144 23,814
20 2 8,390 10,640
23
16 2 270 630
Adjusting Entries
• Allocation of cost of assets to expense over a span of
several accounting period
• Made at the end of the accounting period
• Depreciation – systematic allocation of the cost of an
assets to expenses over the accounting periods making
up asset’s useful life.
• Office Building $3,600 estimated useful life 20 years
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Income Statement
Robert Real Estate Company
Income Statement
For the month ended October 31, 20------
Revenue
Sales Commissions earned $10, 640
Expenses
Advertising Expenses $630
Salaries Expenses 7,100
Telephone Expenses 144
Depreciation Expenses - Buildings 150
Depreciation Expenses – Office Equipment 45 8,069
Net Income $2,571
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Thank you