Transactions That Affect Revenue,

Expenses & Withdrawals

Chapter 5

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

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

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

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

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

Utilities ExpenseUtilities 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

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

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.

Revenue AccountsOwners Equity (permanent account)

Debit

Decrease side

Credit

Increase side

Normal balance

Revenue (temp account)

Debit Credit

Increase side

Normal balance

Decrease side

Revenue represents an inflow of assets and increase in equity.

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.

ExpensesExpenses (temp account)

debit credit

increase Decrease

Normal balance

Expense vs. Revenue

Expenses (temp account)

debit credit

increase Decrease

Normal balance

Revenue (temp account)

Debit Credit

Increase side

Normal balance

Decrease side

Owner’s Capital (permanent account)

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

Withdrawal T AccountWithdrawal (temp account)

debit credit

increase Decrease

Normal balance

Owner’s Capital (Permanent Account)

Expenses (temp account)

debit credit

increase Decrease

Normal balance

Revenue (temp account)

Debit Credit

Increase side

Normal balance

Decrease side

Withdrawal (temp account)

debit credit

increase Decrease

Normal balance

Section 5.2 Objectives

Analyze transactions that affect revenue, expense, and withdrawal accounts

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

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 Accountcash Delivery Revenue

$1200 $1200

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

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 $700

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

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 AccountAd Expense Acct. Payable, Beacon Adv.

$75 $75

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

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. Receivable Delivery Revenue$1450 $1450

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

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 $125

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

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 $600

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

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 $500