chapter four revenue and expense accounts mcgraw-hill/irwin accounting fundamentals, 7/e © 2006 the...

CHAPTER FOUR

REVENUE AND EXPENSE

ACCOUNTS

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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:

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Recording Revenue

•The increase in the owner’s equity that results from revenue is recorded in a separate revenue account.

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Recording Expenses

•Separate expense accounts should be used to record costs of doing business.

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Recording the Owner’s Withdrawals

•The owner of a business may use cash or other assets personally. This is recorded in the withdrawal account.

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The Rules of Debit and Credit

Assets

•Balance side is debit side

•Increase side is debit side

•Decrease side is credit side

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The Rules of Debit and Credit (continued)

Liabilities

•Balance side is credit side

•Increase side is credit side

•Decrease side is debit side

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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

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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

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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

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Transaction

•Rebecca Van Lieu tested and screened job applicants for $800 on credit for a client, Donald Lynch.

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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.

Debit CreditAccounts Receivable 800

800

Account

Revenue

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Transaction

•Rebecca Van Lieu received $400 on account from Donald Lynch.

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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.

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Transaction Analysis (continued)

Debit Credit

Cash 400

400

Account

Accounts Receivable

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Transaction

•Rebecca Van Lieu withdrew $500 in cash from her business for her personal use.

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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

Debit Credit

Rebecca Van Lieu, Withdraw als 500

500

Account

Cash

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Accounting Terminology

•Owner’s equity accounts

•Withdrawals

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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.

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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.

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Chapter Summary (continued)

•Withdrawals are subtracted from the net income to show the net increase or decrease in the owner’s equity.

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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 QuizAnswer the following true/false questions:

TRUE

FALSE

FALSE

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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.

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(Return to Topic Quiz)

1. The balance side of a revenue account is the debit side.

FALSEThe balance side of a revenue

account is the credit side.

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(Return to Topic Quiz)

3. If withdrawals exceed net income, the owner’s equity is increased.

FALSEThe owner’s equity is

decreased.