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 ID: 730076
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Slide1
Transactions That Affect Revenue, Expenses & Withdrawals
Chapter 5 Slide2
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 Slide3
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 expenseSlide4
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 accountsSlide5
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 accountsSlide6
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 Slide7
Utilities Expense
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 periodSlide8
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 accountsSlide9
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. Slide10
Revenue Accounts
Owners 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. Slide11
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. Slide12
Expenses
Expenses (temp account)
debit
credit
increase
Decrease
Normal balanceSlide13
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) Slide14
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 sideSlide15
Withdrawal T Account
Withdrawal (temp account)
debit
credit
increase
Decrease
Normal balanceSlide16
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 balanceSlide17
Section 5.2
Objectives
Analyze transactions that affect revenue, expense, and withdrawal accountsSlide18
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 increaseSlide19
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
$1200Slide20
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 increaseSlide21
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
$700Slide22
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 increaseSlide23
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
$75Slide24
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 $1450Slide25
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
$1450Slide26
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 increaseSlide27
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
$125Slide28
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 increaseSlide29
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
$600Slide30
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--increaseSlide31
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