chapter five - Expanded Ledger: Revenue, Expense, and Drawings

Oct 23, 2026

Chapter five explains how to expand an accounting ledger from a single owner’s equity account into multiple equity section accounts: revenues, expenses, and drawings. It describes why the expanded system is needed to provide managers and owners with decision-relevant information, such as determining profitability during a specific period. Examples compare an initial capital account and trial balance with an expanded ledger and the resulting income statement, then illustrate how revenue transactions are recorded.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages40

Reading Time1 h 41 min

AccessFree to download

5.1 Expanding the Ledger

Purpose of Expanding the System

Expanding the Ledger

Analysis

# chapter five The Expanded Ledger:Revenue,Expense,and Drawings 5.1 Expanding the Ledger 5.2 The Income Statement 5.3 Equity Relationships and the Balance Sheet 5.4 Simply Accounting,Spreadsheets and the Expanded Ledger cdt on sd h omos edcodn odoesdn do ns frcand credit are expanded.The rules regarding the asset and liability accounts will not change.Butthe rules regarding the owner's equity account will be modified. # Expanding the Ledger ## 5.1 To date,you have been accustomed to having a single account for owner's equity.Any change in the equity of the business was recorded in that one account,no mat-ter what caused the change.Now you must become familiar with a system in whichthe ledger has a number of accounts in an equity section.Each of the new accountsreflects a particular kind of transaction that affects owner's equity.In the expandedequity section,you will see new accounts for: revenues,which are related to the sale of goods or services;expenses,which are the costs related to the revenues;drawings,which are the owner's withdrawals for personal use ## Purpose of Expanding the System The new accounts in the equity section of the ledger have one main purpose:to pro-vide essential information about the progress of the business.This information isneeded by managers and owners to see if the business is being run profitably and tohelp them make sound decisions.For example,imagine you are the accountant forEve Boa,a lawyer in her first month of business.If you used the accounting skill youacquired in Chapter 4,her capital account and trial balance would look similar to whatis shown in Figure 5.1. | FIGURE 5.1 | | --- | | The capital account and | | trial balance for Eve Boa, | | a lawyer.LLB stands for | | Bachelor of Laws. | EVE BOA,LLBTRIAL BALANCEJANUARY 31,20—Bank2439 E.Boa,Capital A/R—H.Geroux142021878Jan I,20—A/R—J.Magill75739507290A/R—E.ParsonsI395I3219250Supplies23166157120Office Equipment75503300Automobile16800A/P—OK Supply4400A/P—Computer OutletI20045538Bank Loan94026137 Jan.31,20—→E.Boa,Capital261373267732677 If the owner,Eve Boa,wanted to know how her legal firm performed in its firstmonth,she might ask you the following questions: How much money did the firm make in its first month?How much was spent on advertising?Are the wages fair?Is the rent too high?How much money did I withdraw from the business,for personal expenses? Could you answer Ms.Boa's questions by examining the financial records shown inFigure 5.1?The answer is no.The trial balance shows the assets and the claims onassets at the end of January,but it does not show what happened during the month. Perhaps you could make some guesses about what happened during Januaryfrom examining the E.Boa,Capital account.For instance,it is likely that threecredits(7290,9250,and 7120)are increases in the owner's capital as a result ofsales.But you cannot be sure.Also,which of the debits in the capital account rep-resents advertising?Or rent?Or the money the owner withdrew for personal use?You cannot tell.And if you cannot answer these questions,you certainly cannotanswer the most important question:How much profit was earned in January? From a theoretical point of view,nothing is wrong with the accounting resultspresented in Figure 5.1.The credits are increases to the owner's equity and the debitsare decreases.Yet the accounting system is deficient because it cannot provide theinformation the owner wants. It is easy to provide more complete information.Simply remove January's trans-actions from E.Boa,Capital and place them in accounts with meaningful titles.Figure 5.2 shows what an expanded ledger for Eve Boa would look like: FIGURE 5.2 The expanded ledger ofEve Boa,a lawyer,onJanuary 31. Some of the information in the new accounts is used to prepare an income state-ment,such as the simple one illustrated in Figure 5.3 on page 120.This statement isprepared from information found in

FAQs

Why expand the ledger beyond a single owner’s equity (capital) account?

Because a trial balance and the capital account at period end do not show what happened during the month or provide enough detail to answer questions about profit, advertising, rent, or personal withdrawals.

What new accounts appear in the expanded equity section?

The expanded equity section includes revenues, expenses, and drawings, each reflecting a type of transaction that affects owner’s equity.

How is a revenue transaction recorded when services are paid in cash?

It increases both Bank and equity by the payment amount. Bank is debited and the equity increase from operations is credited to the Fees Earned (revenue) account, not to the owner’s capital account.

Oct 23, 2026

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