Chapter 5 Review 

Expanding the ledger
Each account reflects a specific section on the balance sheet. Such as: Revenue, which are related to the sale of goods or service; Expenses, which are the cost 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 provide essential information about the progress of the business. This information is needed by managers and owners to see if the business is being run profitably and to help them make some decisions. 

Revenue: Selling goods or services produces revenue. Revenue is an increase in equity resulting from the sale of goods or services in the usual course of business. 

Expense: There are costs associated with producing revenue-rent, wages, utilities, advertising, and so on. Each of these costs is known as an expense represents a decrease in equity resulting from the cost of producing the revenue. 

GAAP – The Revenue Recognition Convention 
•	The Revenue Recognition Convention states that revenue must be recorded in the accounts (recognized) at the time the transaction is completed. 
Net Income or Net Loss 
•	It is from the revenue and expense account that a business can tell whether or not it has earned a net income (profit). Net income is the difference between the total revenues and the total expenses.
Drawings 
•	This is the kind of stuff or money that the owner takes out of the business because they own the business and have the right to take the money out as a drawing.

Equity Section Summary 
1.	Capital: This account will now contain only the equity figure at the beginning of the fiscal period, plus new capital from the owner, if any.
2.	Revenue: Increases in equity resulting from the sale of goods or services. A revenue account normally has a credit balance
3.	Expenses: Decreases in equity resulting from the cost of the materials or services used to produce the revenue. An expense account normally has a debit balance. 
Fiscal Period: This is the day that the business first started and it has been a full year from the starting date of the company.