CHAPTER 5 Transactions That Affect Revenue, Expenses, and Withdrawals

OBJECTIVES  Explain the difference between permanent accounts and temporary accounts.  List and apply the rules of debit and credit for revenue, expense, and withdrawals accounts.  Use the six-step method to analyze transactions affecting revenue, expense, and withdrawals accounts.  Test a series of transactions for quality of debits and credits.  Define the accounting terms introduced in this chapter (5).

KEY TERMS  Permanent Account  Temporary Account  Revenue Recognition

WHY IT IS IMPORTANT TO US  Temporary accounts show the changes in owner’s equity during each accounting period. THE MAIN IDEA Revenues, expenses, and with-drawals are temporary accounts. They start each new accounting period with zero balance.

EXPLORING THE REAL WORLD OF BUSINESS While other airlines lost money after the 9/11 disaster, SWA was flying high announced the 39th consecutive year of profitability yesterday. Southwest is in the process of acquiring former competitor, AirTran AirwaysAirTran Airways They became a model for newer airlines to follow

SECTION 5-2 APPLYING THE RULES OF DEBIT AND CREDIT TO REVENUE, EXPENSE, AND WITHDRAWALS TRANSACTIONS. Double-entry accounting requires that total DEBITS and total CREDITS are always equal. THE MAIN IDEA

TEMPORARY ACCOUNTS  Starts each new accounting period with zero balances.  They are used for a short time and then discarded.  Transaction amounts accumulates for only one accounting period.  At the end of the accounting period, the balances are transferred to the owner’s capital account. Expenses Revenue Withdrawals

Relationship to Owner’s Equity Account OWNER’S EQUITY ACCOUNT ExpensesDecreasesRevenueIncreasesWithdrawalsDecreases

Relationship to Owner’s Equity Account OWNER’S EQUITY (CAPITAL) Debit - Credit + Normal EXPENSES Debit + Normal Credit - REVENUE Debit - Credit + Normal WITHDRAWALS Debit + Normal Credit -

Relationship to Owner’s Equity Account OWNER’S EQUITY (CAPITAL) Debit - Credit + Normal Increase Side WITHDRAWALS Debit + Normal Increase Side Credit - REVENUE Debit - Credit + Normal Increase Side EXPENSES Debit + Normal Increase Side Credit -

PERMANENT vs. TEMPORARY ACCOUNTS  are continuous from one accounting period to the next.  The ending balance for each account becomes the beginning balance of the next accounting period.  Shows the balances on hand or amounts owed at any time.  Shows the day-to-day changes.  Starts each new accounting period with zero balances.  They are used for a short time and then discarded.  Transaction amounts accumulates for only one accounting period.  At the end of the accounting period, the balances are transferred to the owner’s capital account.

DEBIT AND CREDIT RULES FOR PERMANENT ACCOUNTS ASSETS Debit + Normal Credit - LIABILITIES Debit - Normal Credit + OWNER’S EQUITY Debit - Normal Credit +

DEBIT AND CREDIT RULES FOR TEMPORARY ACCOUNTS X X X, WITHDRAWAL Debit + Normal Credit - EXPENSES Debit + Normal Credit - REVENUE Debit - Credit + Normal

Problem 5-1 Account TitleAccount ClassificationIncrease SideDecrease SideNormal Balance Advertising ExpenseExpenseDebitCreditDebit Caroline Palmer, WithdrawalOwner’s EquityDebitCreditDebit AirplanesAssetDebitCreditDebit Fuel and Oil ExpenseExpenseDebitCreditDebit Repairs ExpenseExpenseDebitCreditDebit Caroline Palmer, CapitalOwner’s EquityCreditDebitCredit Accounts ReceivableAssetDebitCreditDebit Food ExpenseExpenseDebitCreditDebit Flying FeesRevenueCreditDebitCredit Accounts PayableLiabilityCreditDebitCredit

Problem 5-2 Trans # Account TitleDebitCreditAccount TitleDebitCredit 1Utilities Expense  Cash in Bank  2  Accounts Receivable  3John Albers, Withdrawal  Cash in Bank  4Advertising Expense  Cash in Bank 