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Transactions That Affect Revenue, Expenses & Withdrawals Chapter 5
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.
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Expenses Expenses (temp account) debit credit increase Decrease Normal balance
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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)
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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
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Withdrawal T Account Withdrawal (temp account) debit credit increase Decrease Normal balance
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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
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Section 5.2 Objectives Analyze transactions that affect revenue, expense, and withdrawal accounts
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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