Transactions That Affect Revenue, Expenses & Withdrawals Chapter 5

Ch. 5 Learning Objectives  Explain the difference between permanent accounts and temporary capital accounts  List and apply the rules of debits and credits for revenue, expenses and withdrawal accounts  Use the six step method to analyze transactions affecting revenue, expenses and withdrawal accounts  Test a series of transactions for equality of debits and credits.  Define the new accounting terms introduced in this chapter

Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity  Revenue is not the same as an owner’s investment  Expense is not the same as an owner’s withdrawal  Revenue transactions and expense transactions affect owner’s equity  Set up separate accounts for each type of revenue and each type of expense

Temporary Capital Accounts  Account is an activity that is divided into period of time or accounting periods  Once all of the activities are completed for a given accounting period, that period is closed and a new period starts  Revenue, expense, and withdrawal accounts are used to collect information for a single account period.  -temporary capital accounts

Temporary Capital Accounts  Start each new accounting period with zero balances  Amounts in these accounts are not carried forward from one accounting period to the next  Continued to be used throughout the accounting process but the amounts recorded in them accumulate for only one accounting period  At the end of the accounting period the balances of each are transferred to the owner’s capital accounts

Temporary Capital Accounts  Utilities Expense—temporary capital account  Using this account for electricity, telephone, etc the owner can see at a glance how much money is being spend on this expense  At the end of the accounting period the total balance of utilities expense gets transferred to the capital account

Utilities Expense Owner’s capital Accum. telephone costs $2,857 Accum. Electricity costs $ 5,141 Total for accounting period 7,998 90,000 Balance at beginning period Balance of utilities expense 7,998 82,002 balance at end of period

Permanent Accounts  Continuous from one accounting period the next  Examples: Assets, Liabilities, Owners Equity  Dollar balance at the end of one accounting period becomes the dollar balance for the beginning of the next accounting period  Show balances on hand or amounts owed at any time  Show day-to-day changes in assets, liabilities, and owner’s equity accounts

Rules for Debits and Credits for Revenue Accounts  Rule 1: A revenue account is increased on the credit side.  Rule 2: a revenue account is decreased on the debit side.  Rule 3: The normal balance for a revenue account is the increase side…credit side.

Revenue Accounts Owners Equity (permanent account) Debit Decrease side Credit Increase side Normal balance Revenue (temp account) DebitCredit Increase side Normal balance Decrease side Revenue represents an inflow of assets and increase in equity.

Rules for Expense Accounts  Expenses: costs of goods and services a business uses. AKA the costs of doing business.  Rule 1: An expense account is increased on the debit side.  Rule 2: An expense account is decreased on the credit side.  Rule 3: The normal balance for an expense account is the increase side…debit side.

Expenses Expenses (temp account) debit credit increase Decrease Normal balance

Expense vs. Revenue Expenses (temp account) debit credit increase Decrease Normal balance Revenue (temp account) DebitCredit Increase side Normal balance Decrease side Owner’s Capital (permanent account)

Rules for Withdrawal Accounts  Amount of money or an asset the owner takes out of the business  Decreases capital  Rules are the same as expense accounts  Rule 1: Increased on the debit side  Rule 2: decreased on the credit side  Rule 3: Normal balance—debit side

Withdrawal T Account Withdrawal (temp account) debit credit increase Decrease Normal balance

Owner’s Capital (Permanent Account) Expenses (temp account) debit credit increase Decrease Normal balance Revenue (temp account) DebitCredit Increase side Normal balance Decrease side Withdrawal (temp account) debit credit increase Decrease Normal balance

Section 5.2  Objectives  Analyze transactions that affect revenue, expense, and withdrawal accounts

Business Transaction 8  On Oct. 15, Roadrunner provided delivery services for Sims Corp. A check for $1,200 was received in full payment  Step 1: Identify  Cash in bank  Delivery revenue  Step 2: Classify  Cash in bank—asset  Delivery revenue  Step 3: +/-  Cash in bank--$1200 increase  Delivery Revenue--$1200 increase

Business Transaction 8  On Oct. 15, Roadrunner provided delivery services for Sims Corp. A check for $1,200 was received in full payment  Step 4: Which account is debited?  Cash in bank—debit $1200  Step 5: Which account is credited?  Delivery Revenue—credit $1200  T Account cash Delivery Revenue $1200

Business Transaction 9  On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.  Step 1: Identify  Cash in bank  Rent expense  Step 2: Classify  Cash—asset  Rent expense--expense  Step 3: +/-  Cash-$700 decrease  Rent expense-$700 increase

Business Transaction 9  On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.  Step 4: Which account is debited?  Rent expense--Debit  Step 5: Which account is credited?  Cash--credit  Step 6: T account cash Revenue Expense $700

Business Transaction 10  On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.  Step 1: Identify  Accounts Payable—Beacon Advertising  Advertising Expense  Step 2: Classify  Accounts Payable, Beacon Advertising—liability  Advertising expense--expense  Step 3: +/-  Acct Payable, Beacon Advertising--$75 increase  Advertising Expense--$75 increase

Business Transaction 10  On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.  Step 4: Which account is debited?  Advertising expense--debit  Step 5: Which account is credited?  Acct Payable, Beacon Advertising--credit  Step 6: T Account Ad Expense Acct. Payable, Beacon Adv. $75

Business Transaction 11  On October 20, Roadrunner billed City News $1450 for delivery services.  Step 1: Identify  Account Receivable, City News  Delivery Revenue  Step 2: Classify  Accts Receivable, City News—Asset  Delivery Revenue--revenue  Step 3: +/-  Accts Receivable, City News—increase $1450  Delivery Revenue—increase $1450

Business Transaction 11  On October 20, Roadrunner billed City News $1450 for delivery services.  Step 4: Which account is debited?  Acct Receivable--Debit  Step 5: Which account is credited?  Delivery revenue--credit  T Account Acct. ReceivableDelivery Revenue $1450

Business Transaction 12  On Oct. 28, Roadrunner paid a $125 telephone bill with check 104.  Step 1: Identify  Cash in bank  Utilities expense  Step 2: Classify  Cash in bank—asset  Utilities expense--expense  Step 3: +/-  Cash in bank--$125 decrease  Utilities Expense--$125 increase

Business Transaction 12  On Oct. 28, Roadrunner paid a $125 telephone bill with check 104.  Step 4: Which account is debited?  Utilities expense--debit  Step 5: Which account is credited?  Cash-debit  Step 6: T Account cash Utilities Expense $125

Business Transaction 13  On Oct. 29, Roadrunner wrote check 105 for $600 to have the office repainted.  Step 1: Identify  Cash in bank  Maintenance expense  Step 2: Classify  Cash in bank—asset  Maintenance expense--expense  Step 3: +/-  Cash--$600 decrease  Maintenance expense--$600 increase

Business Transaction 13  On Oct. 29, Roadrunner wrote check 105 for $600 to have the office repainted.  Step 4: Which account is debited?  Maintenance expense--Debit  Step 5: Which account is credited?  Cash--Credit  T Account cash Maintenance expense $600

Business Transaction 14  On Oct 31, Maria Sanchez wrote check 106 to withdraw for personal use.  Step 1: Identify  Cash in bank  Maria Sanchez, withdrawal  Step 2: Classify  Cash—asset  Maria Sanchez, withdrawal—owners equity  Step 3: +/-  Cash—decrease  Maria sanchez, withdrawal--increase

Business Transaction 14  On Oct 31, Maria Sanchez wrote check 106 to withdraw for personal use, $500.  Step 4: Which account is debited?  Maria Sanchez, withdrawal  Step 5: Which account is credited?  Cash in bank  Step 6: T Accounts cash Maria Sanchez, Withdrawal $500