CHAPTER FOUR
REVENUE AND EXPENSE
ACCOUNTS
4-3
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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:
4-4
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Recording Revenue
•The increase in the owner’s equity that results from revenue is recorded in a separate revenue account.
4-5
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Recording Expenses
•Separate expense accounts should be used to record costs of doing business.
4-6
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Recording the Owner’s Withdrawals
•The owner of a business may use cash or other assets personally. This is recorded in the withdrawal account.
4-7
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
The Rules of Debit and Credit
Assets
•Balance side is debit side
•Increase side is debit side
•Decrease side is credit side
4-8
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
The Rules of Debit and Credit (continued)
Liabilities
•Balance side is credit side
•Increase side is credit side
•Decrease side is debit side
4-9
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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
4-10
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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
4-11
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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
4-12
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Transaction
•Rebecca Van Lieu tested and screened job applicants for $800 on credit for a client, Donald Lynch.
4-13
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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
4-14
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Transaction
•Rebecca Van Lieu received $400 on account from Donald Lynch.
4-15
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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.
4-16
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Transaction Analysis (continued)
Debit Credit
Cash 400
400
Account
Accounts Receivable
4-17
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Transaction
•Rebecca Van Lieu withdrew $500 in cash from her business for her personal use.
4-18
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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
4-19
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Accounting Terminology
•Owner’s equity accounts
•Withdrawals
4-20
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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.
4-21
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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.
4-22
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
Chapter Summary (continued)
•Withdrawals are subtracted from the net income to show the net increase or decrease in the owner’s equity.
4-23
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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
4-24
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
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.
4-25
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
(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.
4-26
McGraw-Hill/IrwinAccounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights
Reserved.
(Return to Topic Quiz)
3. If withdrawals exceed net income, the owner’s equity is increased.
FALSEThe owner’s equity is
decreased.