Name Date

CHAPTER 5 The Expanded Ledger: Revenue,

Expenses, and Drawings

SECTION 5.1 REVIEW QUESTIONS (page 140)

1. The new accounts in the equity section of the ledger are revenues, expenses, and drawings.

2. The main purpose of the new accounts in the ledger is to provide essential information about
the progress of the business.
3. A ledger with only one equity account cannot answer the question, “How much profit or loss
was made during a financial period?”
4. In the expanded ledger, the procedure for preparing a trial balance does not change. You
still transfer the final balance of each account to the correct side of the trial balance and
total each column.
5. Three things an income statement does is to show a business’s revenue during a given time
period, its expenses during a given time period, and its profit or loss during a given time period.

6. The two equity accounts that are not included on the income statement are Capital
and Drawings.
7. The date on an income statement covers a period of time, such as a month or a year, while
the date on a balance sheet is for one day.
8. The “bottom line” is the net income or loss shown at the bottom of the income statement.
9. Revenue is an increase in equity resulting from the sale of goods or services.
10. An expense is a decrease in equity resulting from the costs of operating the business.

11. The purpose of an expense is to produce revenue or to help with revenue-making activities.

12. Net income is the difference between total revenues and total expenses when revenues are
more than expenses.
13. Owners are very interested in income statements because they use income statements to
determine the company’s profits, examine financial trends, set goals for the company, and
make business decisions.

14. Bankers are interested in seeing the income statement of a business that has a loan with
them to see whether the business is able to repay the loan.

15. Investors want to provide a business with cash because they can earn a profit on their money
if the business is successful.

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SECTION 5.1 REVIEW QUESTIONS (continued)

16. A business must provide an income statement to the government as part of their annual
income tax return, which helps the government calculate the amount of income tax the
business owes.
17. Drawings are not included on the income statement because they are not always directly
related to earning revenue or to supporting revenue-making activities.
18. A chart of accounts is a list of the ledger accounts and their account numbers in ledger order.

19. This text uses a three-digit account numbering system. Assets are numbered in the 100s.
Liabilities are numbered in the 200s. Capital and Drawings are numbered in the 300s.
Revenues are numbered in the 400s. Expenses are numbered in the 500s.

20. An asset account normally has a debit balance. A liability account normally has a credit
balance. A Revenue account normally has a credit balance. An Expense account normally
has a debit balance. The Drawings account normally has a debit balance. The Capital
account normally has a credit balance.

21. The Capital account will normally contain the beginning equity figure and new investments
from the owner.

SECTION 5.1 EXERCISES (page 141)

Exercise 1, p. 141
A. • The heading should use Mayfare Plumbing instead of the owner’s name.
• Mayfare Plumbing should be the first line in the heading.
• Income Statement should be the second line of the heading.
• The third line of the heading should have Year Ended before the date, since it covers a
period of time not a single date.
• The Capital account should not be listed on the income statement.
• There is only one revenue account, so the revenue total should be listed in the right
column on the same line as Sales and Service.
• Add a blank line between Total Revenue and Operating Expense
• The Drawings account should not be included on the income statement.
• Gas and Oil should be written as Gas and Oil Expense.
• Utilities should be written as Utilities Expense.
• Total expenses should be $32 519.62.
• Net income should be $74 896.38.
• Change Net Profit to Net Income.

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SECTION 5.1 EXERCISES (continued)

Exercise 1, p. 141 (continued)
B. MAYFARE PLUMBING
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 20–

Revenue
Sales and Service $107 4 1 6 –

Operating Expenses
Advertising Expense $ 1 1 5 0 50
Bank Charges 1 7 5 0 –
Car Expense 4 2 9 6 –
Gas and Oil 4 9 3 5 –
Materials Used 15 9 0 6 –
Miscellaneous Expense 2 5 7 –
Telephone Expense 2 5 0 –
Utilities 3 9 7 5 12
Total Expenses 32 5 1 9 62
Net Income $ 74 8 9 6 38

Exercise 2, p. 141

Express Air Service Chart of Accounts

Assets No. Equity No.
Bank
________________________________ 105
_______ Karen Koy, Capital
________________________________ 305
_______
Accounts Receivable
________________________________ 110
_______ Karen Koy, Drawings
________________________________ 310
_______
Supplies
________________________________ 115
_______ ________________________________ _______
Land
________________________________ 120
_______ Revenue—Freight
________________________________ 405
_______
Building
________________________________ 125
_______ Revenue—Passengers
________________________________ 410
_______
Equipment
________________________________ 130
_______ ________________________________ _______
Automobiles
________________________________ 135
_______ Advertising Expense
________________________________ 505
_______
Airplanes
________________________________ 140
_______ Bank Charges Expense
________________________________ 510
_______
________________________________ _______ Building Repairs Expense
________________________________ 515
_______
________________________________ _______ General Expense
________________________________ 520
_______
________________________________ _______ Insurance Expense
________________________________ 525
_______
________________________________ _______ Legal Expense
________________________________ 530
_______
________________________________ _______ Salaries Expense
________________________________ 535
_______
Liabilities No. Supplies Expense
________________________________ 540
_______
Accounts Payable
________________________________ 205
_______ Telephone Expense
________________________________ 545
_______
Mortgage Payable
________________________________ 210
_______ Wages Expense
________________________________ 550
_______

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SECTION 5.1 EXERCISES (continued)

Exercise 3, p. 142
A. EMILY STOKALUK
TRIAL BALANCE
MARCH 31, 20–

ACCOUNTS DEBIT CREDIT

Bank 10 1 0 0 –
Accounts Receivable 8 3 0 0 –
Supplies 9 5 0 –
Land 235 0 0 0 –
Building 210 0 0 0 –
Equipment 22 0 0 0 –
Automobiles 24 0 0 0 –
Accounts Payable 2 8 0 0 –
Bank Loan 10 0 0 0 –
Mortgage Payable 175 0 0 0 –
E. Stokaluk, Capital 252 0 8 8 –
E. Stokaluk, Drawings 15 0 0 0 –
Fees Earned 132 5 0 0 –
Interest Earned 1 0 0 0 –
Advertising Expense 1 2 0 0 –
Bank Charges Expense 3 5 0 –
Building Maintenance Expense 4 2 0 –
Gas and Oil Expense 1 8 0 0 –
Utilities Expense 1 6 4 0 –
Miscellaneous Expense 1 2 8 –
Car Repair Expense 8 5 0 –
Wages Expense 41 6 5 0 –
573 3 8 8 – 573 3 8 8 –

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SECTION 5.1 EXERCISES (continued)

Exercise 3, p. 142 (continued)
B.
E. Stokaluk Chart of Accounts
Assets No. Equity No.
Bank
________________________________ 105
_______ E. Stokaluk, Capital
________________________________ 305
_______
Accounts Receivable
________________________________ 110
_______ E. Stokaluk, Drawings
________________________________ 310
_______
Supplies
________________________________ 115
_______ ________________________________ _______
Land
________________________________ 120
_______ Fees Earned
________________________________ 405
_______
Building
________________________________ 125
_______ Interest Earned
________________________________ 410
_______
Equipment
________________________________ 130
_______ ________________________________ _______
Automobiles
________________________________ 135
_______ Advertising Expense
________________________________ 505
_______
________________________________ _______ Bank Charges Expense
________________________________ 510
_______
________________________________ _______ Building Maintenance Expense
________________________________ 515
_______
________________________________ _______ Gas and Oil Expense
________________________________ 520
_______
Liabilities No. Utilities Expense
________________________________ 525
_______
Accounts Payable
________________________________ 205
_______ Miscellaneous Expense
________________________________ 530
_______
Bank Loan
________________________________ 210
_______ Car Repair Expense
________________________________ 535
_______
Mortgage Payable
________________________________ 215
_______ Wages Expense
________________________________ 540
_______

C. EMILY STOKALUK
INCOME STATEMENT
MONTH ENDED MARCH 31, 20–
Revenue
Fees Earned $132 5 0 0 –
Interest Earned 1 0 0 0 –
Total Revenue $133 5 0 0 –

Expenses
Advertising Expense $ 1 2 0 0 –
Bank Charges Expense 3 5 0 –
Building Maintenance Expense 4 2 0 –
Gas and Oil Expense 1 8 0 0 –
Utilities Expense 1 6 4 0 –
Miscellaneous Expense 1 2 8 –
Car Repair Expense 8 5 0 –
Wages Expense 41 6 5 0 –
Total Expenses 48 0 3 8 –
Net Income $ 85 4 6 2 –

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SECTION 5.1 EXERCISES (continued)

Exercise 4, p. 142
A., B.

ASSETS
Bank Tools and Equipment Truck
1 300.20 Jul. 31 balance 5 156.40 Jul. 31 balance 6 100.00 Jul. 31 balance

LIABILITIES
A/P—Kitzul Tools
Jul. 31 balance1 600.00

EQUITY
S. O’Neill, Capital S. O’Neill, Drawings Renovation Revenue
9 455.60 8 2 250 8 000 2
13 2 250 8 000 6

4 500 5 000 11

21 000

Gasoline Expense Repairs Expense Supplies Expense

4 109.55 3 312.09 1 11 245

5 110.71
9 108.99
10 112.66
441.91

Wages Expense
7 1 500
12 1 500
3 000

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SECTION 5.1 EXERCISES (continued)

Exercise 4, p. 142 (continued)
C. MEADOWLARK MAKEOVERS
TRIAL BALANCE
JULY 31, 20–

ACCOUNTS DEBIT CREDIT

Bank 1 3 0 0 20
Tools and Equipment 5 1 5 6 40
Truck 6 1 0 0 –
A/P—Kitzul Tools 1 6 0 0 –
S. O’Neill, Capital 9 4 5 5 60
S. O’Neill, Drawings 4 5 0 0 –
Renovation Revenue 21 0 0 0 –
Gasoline Expense 4 4 1 91
Repairs Expense 3 1 2 09
Supplies Expense 11 2 4 5 –
Wages Expense 3 0 0 0 –
32 0 5 5 60 32 0 5 5 60

D. MEADOWLARK MAKEOVERS
INCOME STATEMENT
MONTH ENDED JULY 31, 20–

Revenue
Renovation Revenue $21 0 0 0 –

Operating Expenses
Gasoline Expense $ 1 4 4 1 91
Repairs Expense 3 1 2 09
Supplies Expense 11 2 4 5 –
Wages Expense 3 0 0 0 –
Total Expenses 14 9 9 9 –
Net Income $ 6 0 0 1 –

E. Sean should be encouraged by the income statement for July. It shows a net income of
$6001. That is 28.6% of revenue (6001 ÷ 21 000). With this healthy profit, Sean was able to
withdraw $4500 for personal living expenses (drawings), leaving $1501 of assets left over to
help grow the business.

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SECTION 5.2 REVIEW QUESTIONS (page 149)

1. From their normal account balances, two conclusions you can make about equity transactions
are that revenues are normally credited and expenses and drawings are normally debited.

2. You can be reasonably certain that revenue accounts will have a credit balance at the end of
the year because debits to a revenue account are rare. Once a sale amount is recorded in the
account, it usually remains there until year-end.

3. You might want to debit a revenue account when recording a sales return.

4. The revenue recognition principle requires a transaction to be recorded in the accounts of

a business at the time the transaction is completed.

5. Before sending an invoice to a customer, the seller must fulfill its obligations to provide the
promised goods or services.

6. The IFRS allow a seller to record a sale without having delivered the goods so long as it is
probable that delivery will be made; the item is on hand, identified, and ready for delivery;
the buyer is aware of delayed delivery; and the usual payment terms apply.
7. When purchasing advertising on credit, equity decreases from the debit to the Advertising
Expense account even though no assets have left the business. This is due to the creditor
having an increased claim on the business’s assets. The owner’s claim on those assets has
less priority than the creditors’, so the owner’s claim must decrease.
8. Fiscal period is the period of time over which earnings are measured.
9. The student’s statement is accurate in the sense that expenses are expired costs—they have
no future value or role. They have “given up their lives.” Additionally, the mission of these
expired costs was to produce revenue or support revenue-making activities. When they are
subtracted from, or matched against, the revenues they produced or supported, net income
or loss is revealed.

SECTION 5.2 EXERCISES (page 150)

Exercise 1, p. 150
ASSETS = LIABILITIES + EQUITY
1. Supplies Bank
Dr Cr Dr Cr Dr Cr Dr Cr
400 400

2. Bank Bank Loan

Dr Cr Dr Cr Dr Cr Dr Cr
1 000 1 000

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SECTION 5.2 EXERCISES (continued)

Exercise 1, p. 150 (continued)
ASSETS = LIABILITIES + EQUITY
3. Bank A/R––J. Cheung
Dr Cr Dr Cr Dr Cr Dr Cr
800 800

4. Bank Fees Earned

Dr Cr Dr Cr Dr Cr Dr Cr
900 900

5. A/R––B. Hull Fees Earned

Dr Cr Dr Cr Dr Cr Dr Cr
1 500 1 500

6. Bank Utilities Expense

Dr Cr Dr Cr Dr Cr Dr Cr
125 125

M. Hartman,
7. Bank Drawings
Dr Cr Dr Cr Dr Cr Dr Cr
750 750

8. Bank Wages Expense

Dr Cr Dr Cr Dr Cr Dr Cr
600 600

9. Truck Bank
Dr Cr Dr Cr Dr Cr Dr Cr
20 000 20 000

M. Hartman,
10. Supplies Drawings
Dr Cr Dr Cr Dr Cr Dr Cr
250 250

A/P–– Advertising
11. Advance News Expense
Dr Cr Dr Cr Dr Cr Dr Cr
2 000 2 000

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SECTION 5.2 EXERCISES (continued)

Exercise 2, p. 150
Debits Credits

1. Chemical Supplies A/P—Pesticide Products

Dr Cr Dr Cr
125 125

2. Equipment A/P—Pro Hardware

Dr Cr Dr Cr
150 150

3. Wages Expense Bank

Dr Cr Dr Cr
100 100

4. Bank Landscaping Revenue

Dr Cr Dr Cr
50 50

5. A/R—G. Yung Landscaping Revenue

Dr Cr Dr Cr
100 100

6. Advertising Expense A/P—Banner News

Dr Cr Dr Cr
50 50

7. E. Inahaba, Drawings Bank

Dr Cr Dr Cr
175 175

8. Interest Expense Bank

Dr Cr Dr Cr
90 90

9. E. Inahaba, Drawings Landscaping Revenue

Dr Cr Dr Cr
100 100

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SECTION 5.2 EXERCISES (continued)

Exercise 3, p. 151
A., B.

ASSETS
Bank A/R––S. McNeil Supplies
1 6 000 1 500 2 7 2 500 4 800
3 4 000 160 6

5 1 200 1 800 8

1 400 9

11 200 4 860

6 340

LIABILITIES
A/P––Percy’s
Bank Loan A/P––Northern Utilities Office Outfitters
6 000 1 400 10 800 4

EQUITY
A. Dodds, Capital A. Dodds, Drawings Fees Earned
4 000 3 9 1 400 1 200 5

2 500 7

3 700

Rent Expense Telephone Expense Utilities Expense

2 1 500 6 160 10 400

Wages Expense
8 1 800

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SECTION 5.2 EXERCISES (continued)

Exercise 3, p. 151 (continued)
C. SPALDING CONSULTANTS
TRIAL BALANCE
NOVEMBER 30, 20–

ACCOUNTS DEBIT CREDIT

Bank 6 3 4 0 –
A/R—Sarah McNeil 2 5 0 0 –
Supplies 8 0 0 –
Bank Loan 6 0 0 0 –
A/P—Percy’s Office Outfitters 8 0 0 –
A/P—Northern Utilities 4 0 0 –
A. Dodds, Capital 4 0 0 0 –
A. Dodds, Drawings 1 4 0 0 –
Fees Earned 3 7 0 0 –
Rent Expense 1 5 0 0 –
Telephone Expense 1 6 0 –
Utilities Expense 4 0 0 –
Wages Expense 1 8 0 0 –
14 9 0 0 – 14 9 0 0 –

Exercise 4, p. 152
A. The Bank account normally has a debit balance.
B. A revenue account normally has a credit balance.
C. An expense account normally has a debit balance.
D. Paying a creditor involves a debit entry to the creditor’s account.
E. The Drawings account receives a debit entry when the owner withdraws
money for personal use.
F. A lawyer gives a cash refund to a customer. The Bank account will receive
a credit entry and the Revenue account will receive a debit
entry.
G. Supplies are bought on credit. The Supplies account will receive a debit
entry and the supplier’s account payable will receive a credit entry.
H. The Drawings account will not normally receive credit entries.
I. An increase in equity can be thought of as a credit to the Capital account.
J. Net income can be thought of as a credit to the Capital account.
K. Net loss can be thought of as a debit to the Capital account.
L. The owner takes a computer from the business for his personal (permanent) use.
The Drawings account will receive a debit entry.

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SECTION 5.2 EXERCISES (continued)

Exercise 5, p. 152

EQUITY
ASSET LIABILITY Revenue Expense Drawings
No. Increase Decrease Decrease Increase Increase Decrease Decrease
1. ✔ ✔
2. ✔ ✔
3. ✔ ✔
4. ✔ ✔ ✔
5. ✔ ✔
6. ✔ ✔
7. ✔ ✔
8. ✔ ✔
9. ✔ ✔
10. ✔ ✔

SECTION 5.3 REVIEW QUESTIONS (page 156)

1. The two major financial statements learned so far are the balance sheet and the income
statement.

2. The equity equation for a profit situation is

Beginning Capital + Net Income – Drawings = Ending Capital.

3. The equity equation for a loss situation is

Beginning Capital – Net Loss – Drawings = Ending Capital.

4. You will find the beginning equity figure in the Capital account.

5. Changes to equity are recorded in the Revenue, Expense, and Drawings accounts.
Occasionally, changes will be entered directly in the Capital account, such as an
additional investment by the owner (debit Bank, credit Capital).

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SECTION 5.3 REVIEW QUESTIONS (continued)

6. Drawings do not affect the calculation of net income. Drawings affect the calculation of the
ending capital on the balance sheet.

7. If Drawings are greater than net income, there will be an overall decrease in equity.

8. The statement is most often true. A net loss represents a decrease in equity from normal
business operations. Therefore, in most cases, equity would decrease with a net loss, even
if drawings are zero.

9. Equity could increase if there was a net loss if the owner invested additional funds in the
business.

SECTION 5.3 EXERCISES (page 157)

Exercise 1, p. 157

Net Income or
Items Opening Capital Net Loss (+) Drawings Ending Capital
A. $ 30 000 $ 15 000 $ 10 000 $ 35 000
B. 50 000 −2 000 7 000 41 000
C. 70 000 32 000 26 500 75 500
D. 36 700 16 000 19 500 33 200
E. 56 000 14 000 30 000 40 000
F. 45 000 −5 000 25 000 15 000
G. 22 000 16 000 10 000 28 000
H. 35 000 25 000 18 000 42 000
I. 120 000 42 000 50 000 112 000

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SECTION 5.3 EXERCISES (continued)

Exercise 2, p. 157

Financial Information Company Company Company Company Company

1 2 3 4 5
Beginning capital $ 6 000 $ 6 000 $ 15 000 $ 5 000 $ 62 000
Total revenues 10 000 25 000 29 000 50 000 30 000
Total expenses 8 000 11 000 18 000 30 000 35 000
Net income or loss (−) 2 000 14 000 11 000 20 000 −5 000
Drawings 3 000 12 000 17 000 15 000 5 000
Increase or decrease (−) in equity −1 000 2 000 −6 000 5 000 −10 000
Ending capital 5 000 8 000 9 000 10 000 52 000

Exercise 3, p. 158
G. Benvie

G. Benvie, Capital
Balance January 1 $27 0 4 2 62
Net Income $39 1 7 1 04
Less: Drawings (35 0 0 0 –)
Increase in Capital 4 1 7 1 04
Balance December 31 $31 2 1 3 66

S. Robb

S. Robb, Capital
Balance January 1 $19 6 4 1 25
Net Income $22 4 6 2 67
Less: Drawings (25 5 7 5 –)
Decrease in Capital (3 1 1 2 33)
Balance March 31 $16 5 2 8 92

J. Bedford

J. Bedford, Capital
Balance May 1 $20 1 9 6 74
Net Loss ($ 3 7 5 0 20)
Less: Drawings (10 0 4 7 17)
Decrease in Capital (13 7 9 7 37)
Balance May 31 $6 3 9 9 37

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SECTION 5.4 EXERCISES (page 163)

Exercise 1, p. 163
This is a spreadsheet exercise.

Exercise 2, p. 163
At first glance, it appears that the business is not meeting Anna’s objective of a $2000 monthly
profit. Her claim on assets increased by $975 during the month after drawings of $600 and a net
income of $1575. The net income, however, was reduced by a loss on equipment of $750. If this
one-time, non-cash expense is ignored then the actual net income in October was $2375, a figure
that is slightly more than Anna’s goal.

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CHAPTER 5 REVIEW EXERCISES (page 164)

Using Your Knowledge

Exercise 1, p. 164

A. Asset debit Dr Cr
B. Asset credit 1. Purchase a new car on account. 1. A D
C. Liability debit 2. Receive payment on account from a customer. 2. A B
D. Liability credit 3. Owner withdraws cash for personal use. 3. G B
E. Capital debit 4. Owner starts a new business by investing cash. 4. A F
F. Capital credit 5. The car is repaired and paid for in cash immediately. 5. K B
G. Drawings debit 6. Perform a service for a customer for cash. 6. A J
H. Drawings credit 7. Perform a service for a customer on account. 7. A J
I. Revenue debit 8. Purchase supplies for cash. 8. A B
J. Revenue credit 9. Receive a bill for gas and oil for the car. 9. K D
K. Expense debit 10. Pay a creditor on account. 10. C B
L. Expense credit 11. Throw out some ruined supplies. 11. K B

Exercise 2, p. 165
BIANCO COMPANY
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 20–
Revenue
Fees Earned $47 4 1 6 –

Operating Expenses
Car Expense $ 2 4 8 2 –
Rent Expense 3 5 0 0 –
Utilities Expense 1 0 7 5 –
Wages Expense 18 0 7 2 –
Total Expenses 25 1 2 9 –
Net Income $22 2 8 7 –

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CHAPTER 5 REVIEW EXERCISES (continued)

Exercise 3, p. 165
A.

Debits Credits
Account(s) Amount Account(s) Amount
1. P. Garside, Capital 150 Revenue 150
2. P. Garside, Drawings 500 Wages Expense 500
3. Car Expense 400 Automobiles 400
4. Equipment 110 Car Expense 110

A/R— A/R—
Bank P. Alder A. Jackson Supplies
1 745 50 70 610

A/P— A/P—
Equipment Automobiles B & B Stone Century Finance
5 000 7 900 400 3 110 5 500
4 110

P. Garside, P. Garside,
Capital Drawings Revenue Car Expense
1 150 5625 200 11 920 500 110 4

2 500 150 1 3 400

Utilities Expense Rent Expense Wages Expense

280 300 6 500 500 2

B. The corrected net income will be $4700 .

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CHAPTER 5 REVIEW EXERCISES (continued)

Exercise 4, p. 166
A. ATLAS ASSOCIATES
INCOME STATEMENT
MONTH ENDED NOVEMBER 30, 20–
Revenue
Fees Earned $31 7 0 0 –
Expenses
Salaries Expense $13 4 0 0 –
Rent Expense 6 0 0 0 –
General Expense 1 2 0 0 –
Advertising Expense 6 0 0 –
Car Expenses 3 7 0 0 –
Utilities Expense 3 5 0 0 –
Total Expenses 28 4 0 0 –
Net Income $ 3 3 0 0 –

B. The clerk violated the matching principle (GAAP and ASPE) or the framework of reliability
under IFRS. The wage advance should be accounted for in the month it is earned so it can
be matched with the revenue it helped generate.

C. $31 700 – ($28 400 – $1400) = $4700

The November net income should be $4700.

D. The net income in December would be higher if the matching principle was not followed.

Exercise 5, p. 166
Beginning
Assets = Liabilities + + Revenues – Expenses – Drawings
Capital
End of Year 1 100 = 20 + 70 + 60 – 45 – 5
End of Year 2 120 = 30 + 80 + 90 – 60 – 20
End of Year 3 130 = 35 + 90 + 105 – 80 – 20
End of Year 4 130 = 30 + 95 + 110 – 95 – 10

Exercise 6, p. 167
Assets Liabilities Equity
End of 20–1 $44 700 $ 27 400 $17 300
End of 20–2 $39 700 $20 400 $ 19 300

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CHAPTER 5 REVIEW EXERCISES (continued)

Comprehensive Exercise
Exercise 7, p. 167
A., B.

Bank A/R––Jenkins and Co. Office Supplies

5 000 300 1 4 900 300 7 1 300
5 175 50 2 14 600 12 120
7 300 100 6 1 500 420
17 5 000 500 8 1 200
120 9

750 11

120 12

50 13

70 15

1 500 16

10 475 3 560

6 915

Office Equipment Automobile Bank Loan

3 1 100 18 000 5 000 17

A/P––Office Equippers N.A. James, Capital N.A. James, Drawings

8 500 1 100 3 23 000 10 200
600 16 1 500
1 700

Fees Earned Advertising Expense Car Expense

900 4 2 50 9 120
175 5 13 50
200 10 100
600 14

1 875

Donations Expense Miscellaneous Expense Rent Expense

6 100 15 70 11 750

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CHAPTER 5 REVIEW EXERCISES (continued)

Exercise 7, p. 167 (continued)
C. N.A. JAMES
TRIAL BALANCE
OCTOBER 31, 20–

ACCOUNTS DEBIT CREDIT

Bank 6 9 1 5 –
A/R—Jenkins and Co. 1 2 0 0 –
Office Supplies 4 2 0 –
Office Equipment 1 1 0 0 –
Automobile 18 0 0 0 –
A/P—Office Equippers 6 0 0 –
Bank Loan 5 0 0 0 –
N.A. James, Capital 23 0 0 0 –
N.A. James, Drawings 1 7 0 0 –
Fees Earned 1 8 7 5 –
Advertising Expense 1 0 0 –
Car Expense 1 2 0 –
Donations Expense 1 0 0 –
Miscellaneous Expense 7 0 –
Rent Expense 7 5 0 –
30 4 7 5 – 30 4 7 5 –

D. N.A. JAMES
INCOME STATEMENT
MONTH ENDED OCTOBER 31, 20–
Revenue
Fees Earned $1 8 7 5 –

Expenses
Advertising Expense $ 1 0 0 –
Car Expense 1 2 0 –
Donations Expense 1 0 0 –
Miscellaneous Expense 7 0 –
Rent Expense 7 5 0 –
Total Expenses 1 1 4 0 –
Net Income $ 7 3 5 –

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CHAPTER 5 REVIEW EXERCISES (continued)

Exercise 7, p. 167 (continued)
E. N.A. JAMES
BALANCE SHEET
OCTOBER 31, 20–
ASSETS
Current Assets
Bank $ 6 9 1 5 –
A/R—Jenkins and Co. 1 2 0 0 –
Office Supplies 4 2 0 –
Total Current Assets $ 8 5 3 5 –
Long-Term Assets
Office Equipment $ 1 1 0 0 –
Automobile 18 0 0 0 –
Total Long-Term Assets 19 1 0 0 –
Total Assets $27 6 3 5 –

LIABILITIES
Current Liabilities
A/P—Office Equippers $ 6 0 0 –
Bank Loan 5 0 0 0 –
Total Current Liabilities $ 5 6 0 0 –

OWNER’S EQUITY
N.A. James, Capital
Balance October 1 $23 0 0 0 –
Net Income $ 7 3 5 –
Less: Drawings (1 7 0 0 –)
Decrease in Capital (9 6 5 –)
Balance October 31 22 0 3 5 –
Total Liabilities and Owner’s Equity $27 6 3 5 –

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CHAPTER 5 REVIEW EXERCISES (continued)

PERSONALIZE IT (page 168)
A. Answers will vary. Students should describe five new transactions that involve their equity
accounts and repeat the 12 transactions from Chapter 4.

B. Answers will vary. Students should expand their equity section from Chapter 4 to include a
drawings account, at least one revenue account, and several expense accounts.

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CHAPTER 5 REVIEW EXERCISES (continued)

PERSONALIZE IT (continued)
C., D. Ledger Accounts Answers will vary.

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CHAPTER 5 REVIEW EXERCISES (continued)

PERSONALIZE IT (continued)
E. Trial Balance Answers will vary.

ACCOUNTS DEBIT CREDIT

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CHAPTER 5 REVIEW EXERCISES (continued)

PERSONALIZE IT (continued)
E. (continued)
Income Statement Answers will vary.

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CHAPTER 5 REVIEW EXERCISES (continued)

PERSONALIZE IT (continued)
E. (continued)
Balance Sheet Answers will vary.

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CHAPTER 5 REVIEW EXERCISES (continued)

PERSONALIZE IT (continued)
F. (Optional) Answers will vary.

Chart of Accounts
Assets No. Equity No.
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
Liabilities No.
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______
________________________________ _______ ________________________________ _______

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CHAPTER 5 REVIEW EXERCISES (continued)

SHARE IT (page 169)
Ledger Accounts Answers will vary.

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CHAPTER 5 REVIEW EXERCISES (continued)

SHARE IT (continued)
Trial Balance Answers will vary.

ACCOUNTS DEBIT CREDIT

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CHAPTER 5 REVIEW EXERCISES (continued)

SHARE IT (continued)
Income Statement Answers will vary.

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CHAPTER 5 REVIEW EXERCISES (continued)

SHARE IT (continued)
Balance Sheet Answers will vary.

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CHAPTER 5 REVIEW EXERCISES (continued)

Questions for Further Thought, p. 170
1. The owner would calculate the net income by carefully inspecting the Capital account and
adding all the revenues earned less all the expenses incurred. Calculating the change in
equity from one year to another would only give a rough indication of net income because
other equity items like drawings and additional investments would affect the result.
2. Equity represents the owner’s claim on assets. Since equity is on the right side of the
accounting equation, it increases on the credit side and decreases on the debit. By nature,
expense accounts decrease equity and therefore are recorded with debits. When expenses go
up, equity goes down so an increase in an expense must be recorded as a debit.

3. There are usually only one or two revenue accounts because, in most cases, a business’s
revenue comes from only one or two sources. There are many expense accounts because there
are many different types of costs incurred when running a business.

4. A banker would be interested in the net income or loss on the income statement, which
would show the profitability of the business. A banker would also be interested in the assets
and liabilities on the balance sheet, which shows how much debt is owned by the business
compared to the value of its assets. These things will show the banker if the business can
honour its debts to the bank.

5. A company has to produce an annual statement because the government requires all
businesses to file income tax statements every year.
6. To determine the equity amount from the ledger, you could subtract the total of the
liability accounts from the total of the asset account (Assets − Liabilities = Equity). Or you
could add the capital and revenue accounts and then subtract the drawings and expense
accounts (Capital + Revenues – Drawings – Expenses = Equity).

7. A. A medical office would have a revenue account called Fees Earned.

B. A loan company would have a revenue account called Interest Revenue.
C. A photography company could have a revenue account called Photo Shoots Revenue or
Photo Enhancements Revenue.
D. A real estate company would have a revenue account called Commissions Earned.
E. A hair salon could have a revenue account called Hair Cut Fees, or Colouring Fees, or
Permanents.
F. A dry cleaning company would have a revenue account called Cleaning Revenue.

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CHAPTER 5 REVIEW EXERCISES (continued)

Questions for Further Thought, p. 170 (continued)
8. A business could be quite profitable and yet have a cash shortage because the owner takes
out more money than the company earns in revenue. Or, the business could spend much of
its profits on new equipment or other assets.

9. The Bank account could have a credit balance if a company withdraws more than the actual
bank balance. This is allowed if the company has overdraft protection. A credit balance in a
Bank account is an exceptional balance.

10. Businesses prefer to purchase on credit because it leaves them with cash for other expenses,
they can inspect the goods before paying, and they can withhold payment if the goods are
unsatisfactory or damaged.

11. It is as important to control the expenses of a business as it is to increase the revenues

because expenses decrease the net income of a business. A business can earn a large revenue
and still not make a profit if its expenses are too high.

12. No, you cannot be sure who has the better earnings because you do not know how long each
person took to earn the money. If John took longer to earn the money or it was the same
time period, then Gary clearly earned more. But if Gary took longer to earn the money, John
might have earned more.
13. To make a larger profit, the revenue must be greater or the expenses must be lower, or both.
Bonanza Burger could sell cheaper burgers than Giant Burger and make a larger profit
because they sell more burgers per week, resulting in greater revenue. Or Bonanza Burger
could have a better deal with their suppliers so they pay less for their ingredients, resulting
in a lower per burger cost, which means they earn more profit on each burger sold. Another
possibility is that Bonanza Burger pays less rent or lower wages, resulting in lower overall
expenses.

CASE STUDIES (page 171)

Case 1 Timing Is Everything (p. 171)

1. The company should choose a time period of one year for its income statements to accurately
show the company’s profitability. This includes the busy and the slow season and shows a
full business cycle in this industry.

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CASE STUDIES (continued)

Case 1 Timing Is Everything (continued)

2. The period from October to March was very profitable because people purchased
snowmobiles in the winter. High sales revenues resulted in large profits.
3. $520 000 + (–$100 000) = $420 000
The true profit for last year’s operations was $420 000.
4. Yes, the firm’s accountant has an ethical obligation to reveal both income statements to the
group of investors. Financial statements must be accurate and representative of the
company’s performance. An annual statement is the most relevant, reliable, and comparable
because it will contain the seasonal fluctuations from year to year.

Case 2: Challenge Revenue Roulette (p. 171)

1. If Tom recognized the full $10 000 as revenue on the August income statement, revenue for
June and July would be severely understated. Net income would also be understated,
especially if Tom’s income statement recognized June’s and July’s expenses.

2. Tom could record the revenue when the installments are paid. This is better than waiting
until the end of August to record the full $10 000, but it is not ideal. For instance, by the end
of July, Tom will have completed 90% of the work but will have only recorded 60% of the
revenue ($6000 ÷ $10 000). A better method is to tie the revenue recognition to the percent-
age of work completed. For example, instead of recording $3000 in June, Tom would record
$4000 (40% × $10 000).
3. If Tom uses installment payments, he should recognize $3000 of the revenue in July. If he
uses percentage of work completed, he should recognize 50% of the revenue or $5000 in July.
Student preferences will vary. It could depend on when income or sales taxes are due.
If either are due in June or July, waiting until the end of August to record revenue might
provide a temporary benefit.

Case 3: Challenge Something Fishy? (p. 172)

1. Students’ opinions will vary. Students should conclude that while zapping technology makes
cheating electronic cash registers possible, the technology does not cause the problem. Before
advances in electronic technology, an unethical practice called cash register
skimming was still a worry. Skimming is the removal of cash before it has been recorded in
an organization’s books. Even with simplistic, non-electronic methods of receiving cash, it
can still be removed before the receipt is recorded.

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CASE STUDIES (continued)

Case 3: Challenge Something Fishy? (continued)

2. Sales-zapping technology does not work well on debit or credit card transactions because
these transactions involve a third party, the bank, which keeps its own records that cannot
be erased by the merchant.

3. To say that reporting income for taxation is based on the honour system is true because the
CRA trusts that you are accurately reporting your income. However, the statement is abso-
lutely true because the CRA has the right to examine all your records and ask you to prove
your income if it becomes suspicious of your claim. The CRA helps maintain the honour sys-
tem by imposing heavy fines and penalties, as it did in the Sushi case.

4. If the restaurant staff are paid in unrecorded cash, they will not report the employment
income they receive, so the government loses their personal income tax as well as income tax
from the restaurant. Payroll plans, such as Employment Insurance and the Canada Pension
Plan, also lose contributions. In addition, the restaurant will not pay the sales tax owed to
the government on the unrecorded revenue.

5. To confirm that sales-zapping has occurred at the restaurant, you could check the ledger
accounts for food and beverage purchases, and for wages. If the company is selling more
meals than it records then there should be a discrepancy between the food purchased from
suppliers and the food sales. If they are paying their staff in cash, the Wages Expense
account should be much less than normal for that type of restaurant.

6. Answers will vary. Students should weigh the short-term benefits of the cash with the long-
term consequences of cheating the government, especially if accounting is their chosen career.
The best course of action would be to use your accounting knowledge to show your aunt and
uncle how paying income tax is a benefit to them and your family (free healthcare, free or
reduced daycare, free schooling, clean air and drinking water, good roads, and so on). Also
suggest ways to increase the restaurant revenues and reduce expenses so that a good profit
can be earned honestly.

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CAREER Matthew Hopkins/Banker (page 174)

Discussion (p. 174)

1. Matthew prepared for his career in university by transferring from engineering to economics
and taking courses in economics, accounting, and finance.

2. Matthew is social, outgoing, friendly, and compassionate.

3. Matthew spends most of his time talking to clients so these traits help him communicate
with and understand his clients.

Research (p. 174)

4. Answers will vary. Students should identify the person they are interviewing, the person’s
title, institution the person works in, and provide a summary of their job description. A list
of the traits the interviewee feels is relevant to their job should be included. A comparison
between Matthew Hopkins’ personality traits and the interviewee’s should be made.

114 Accounting 1 Teacher’s Key Copyright © 2013 Pearson Canada Inc.