3. CHAPTER FOUR REVENUE AND EXPENSE ACCOUNTS

4. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-3 1. Record debits and credits in revenue, expense, and withdrawal accounts. 2. Explain the rules of debit and credit. 3. Apply the rules of debit and credit for revenue, expense, and withdrawals on owner’s equity. REVENUE AND EXPENSE ACCOUNTS Objectives:

5. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-4 Recording Revenue The increase in the owner’s equity that results from revenue is recorded in a separate revenue account.

6. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-5 Recording Expenses Separate expense accounts should be used to record costs of doing business.

7. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-6 Recording the Owner’s Withdrawals The owner of a business may use cash or other assets personally. This is recorded in the withdrawal account.

8. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-7 The Rules of Debit and Credit Assets Balance side is debit side Increase side is debit side Decrease side is credit side

9. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-8 The Rules of Debit and Credit (continued) Liabilities Balance side is credit side Increase side is credit side Decrease side is debit side

10. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-9 The Rules of Debit and Credit (continued) Owner’s Equity Beginning investment is on credit side Increases are on credit side Decrease are on debit side

11. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-10 The Rules of Debit and Credit (continued) Revenue Accounts Increases in owner’s equity through revenue are on the credit side Decreases in owner’s equity through reduction of revenue are on the debit side

12. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-11 The Rules of Debit and Credit (continued) Expense Accounts Decreases in owner’s equity through expenses on the debit side Increases in owner’s equity through reduction of expense on the credit side

13. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-12 Transaction Rebecca Van Lieu tested and screened job applicants for $800 on credit for a client, Donald Lynch.

14. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-13 Transaction Analysis The increase in the asset Accounts Receivable is recorded as a debit to the Accounts Receivable account. Because revenue was earned, owner’s equity increased and is reflected by a credit to revenue.

15. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-14 Transaction Rebecca Van Lieu received $400 on account from Donald Lynch.

16. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-15 Transaction Analysis This transaction involves only an exchange of one asset (accounts receivable) for another (cash). It is recorded by debiting the Cash account and crediting the Accounts Receivable account.

17. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-16 Transaction Analysis (continued)

18. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-17 Transaction Rebecca Van Lieu withdrew $500 in cash from her business for her personal use.

19. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-18 Transaction Analysis Owner’s equity is decreased by $500 by debiting the Withdrawals account. The asset Cash is decreased by $500 by crediting the Cash account

20. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-19 Accounting Terminology Owner’s equity accounts Withdrawals

21. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-20 Chapter Summary Many business transactions involve earning revenue and incurring expenses. A separate account is opened for each major revenue and expense. A separate withdrawal account is opened to record the owner’s withdrawals.

22. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-21 Chapter Summary (continued) At the end of the period of operations, all revenue and expenses are totaled. Net income or loss is derived after subtracting expenses from revenue and increases or decreases the owner’s equity.

23. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-22 Chapter Summary (continued) Withdrawals are subtracted from the net income to show the net increase or decrease in the owner’s equity.

24. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-23 1. The balance side of a revenue account is the debit side. 2. The balance side of an expense account is the debit side. 3. If withdrawals exceed net income, the owner’s equity is increased. Topic Quiz Answer the following true/false questions: TRUE FALSE

25. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-24 Investigating on the Internet Sources of information about revenue and expense accounts can be accessed at a website for a business. As a research assignment, access the corporate website and report those sources of information that might concern revenue and expense accounts used in the operation of the business.

26. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-25 (Return to Topic Quiz) 1. The balance side of a revenue account is the debit side. FALSE The balance side of a revenue account is the credit side.

27. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-26 (Return to Topic Quiz) 3. If withdrawals exceed net income, the owner’s equity is increased. FALSE The owner’s equity is decreased.