Revenues & Expenses - Accounting 101 #3

Summary

In this lesson of Accounting 101, Greg Lamb breaks down the concepts of revenue, expenses, and their impact on a business's equity. He explains how net income, calculated as revenue minus expenses, is a key part of equity. Through examples, he demonstrates how transactions like a sale or purchase affect revenue, assets, and liabilities. Greg also touches on how debits and credits work in these scenarios, ensuring a balanced accounting equation. The lesson concludes with a recap and a preview of the next lesson on types of accounts in accounting.

Takeaways

• 😀 Net income is calculated as Revenue minus Expenses, representing a company's profit or loss.
• 😀 Revenue increases Equity, whereas Expenses decrease Equity in the accounting equation.
• 😀 The formula for the accounting equation is: Assets = Liabilities + Equity.
• 😀 When Revenue increases, both Revenue and Equity go up, leading to higher net income.
• 😀 When Expenses increase, Equity decreases, reducing the overall net income.
• 😀 A sale generating $1,500 in revenue is recorded as a credit to the cafe sales account and a debit to the bank account.
• 😀 Bank accounts increase when money is deposited, reflecting an increase in assets.
• 😀 In the case of an expense, like purchasing office supplies, the expense account is debited, and the liability account (credit card) is credited.
• 😀 Expenses and liabilities increase when an expense is incurred, affecting both the income statement and balance sheet.
• 😀 Adjusting Revenue or Expenses automatically affects the Equity portion of the accounting equation.
• 😀 Understanding net income and how it connects to both Revenue and Expenses is crucial for managing financial statements and business health.

Q & A

What is the basic accounting equation?

The basic accounting equation is: Assets = Liabilities + Equity.

How are revenue and expenses related to net income?

Net income equals Revenue minus Expenses. It represents the money a company made (if positive) or lost (if negative).

What happens to equity when revenue increases?

When revenue increases, equity also increases, as net income is a part of equity.

How do revenue and expenses affect a company's equity?

Revenue increases equity, while expenses decrease equity. Both affect net income, which is included in equity.

What happens when a business makes a sale, such as selling $1,500 in a café?

When a business makes a sale, the revenue increases, which is recorded by crediting the sales account, and the asset (bank account) increases by debiting it with the same amount.

How do you record a sale in accounting?

In accounting, you credit the revenue account (e.g., café sales) and debit the asset account (e.g., bank account) when recording a sale.

What happens to assets and equity after a sale?

After a sale, assets (like the bank account) increase, and equity increases as net income rises due to the increased revenue.

How do you record an expense, such as purchasing office supplies for $125 using a credit card?

To record an expense, debit the expense account (e.g., office supplies) and credit the liabilities account (e.g., credit card) to reflect the increase in expenses and liabilities.

What happens when an expense is recorded in the accounting equation?

When an expense is recorded, it decreases equity because it reduces net income. The corresponding liability increases, reflecting the money owed.

How does the accounting equation change when there is an expense?

When an expense is recorded, assets and equity are unaffected directly. However, liabilities increase due to the expense being credited to the liabilities account, which decreases equity.