Transactions That Affect Revenue, Expenses, and Withdrawals

Transactions That Affect Revenue, Expenses, and Withdrawals

Making Accounting Relevant

Businesses earn revenue by selling

products or services. Think of a

business in your community.

Making Accounting Relevant

Businesses earn revenue by selling

products or services. Think of a

business in your community.

How does this business earn its revenue?How does this business earn its revenue?

Section 1Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity

Section 1Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity

What You’ll Learn

The reason for having temporary and permanent accounts.

The rules of debit and credit for the revenue, expense, and withdrawals accounts.

What You’ll Learn

The reason for having temporary and permanent accounts.

The rules of debit and credit for the revenue, expense, and withdrawals accounts.

Why It’s Important

The proper handling of transactions

that affect temporary and permanent

accounts is essential to maintaining

accurate financial records.

Why It’s Important

The proper handling of transactions

that affect temporary and permanent

accounts is essential to maintaining

accurate financial records.

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Key Terms

temporary capital accounts

permanent accounts

Key Terms

temporary capital accounts

permanent accounts

Temporary Capital Accounts

Revenue, expense, and withdrawals

accounts are used to collect

information for a single accounting

period.

At the end of that period, the

balances in the temporary capital

accounts are transferred to the

owner’s capital account.

Temporary Capital Accounts

Revenue, expense, and withdrawals

accounts are used to collect

information for a single accounting

period.

At the end of that period, the

balances in the temporary capital

accounts are transferred to the

owner’s capital account.

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

The Relationship of Temporary Capital Accounts to the Owner’s Capital Account

The Relationship of Temporary Capital Accounts to the Owner’s Capital Account

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Utilities ExpenseAccumulated telephone costs for accountingperiod $2,857Accumulated electricitycosts for accountingperiod 5,141

Total for accountingperiod $7,998

Owner’s CapitalBalance at Beginning of Accounting Period $90,000

Balance at End ofAccounting Period $82,002

Balance of UtilitiesExpense $7,998

Utilities Expense balance transferred to Owner’s Capital at end of accounting period. Expenses decrease owner’s capital.

Permanent Accounts

Owner’s capital account

Asset and liability accounts

Permanent accounts are

continuous from one

accounting period to the

next.

Permanent Accounts

Owner’s capital account

Asset and liability accounts

Permanent accounts are

continuous from one

accounting period to the

next.

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Rules for Revenue Accounts

Revenue earned from selling goods

or services increases owner’s capital.

Rules for Revenue Accounts

Revenue earned from selling goods

or services increases owner’s capital.

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Revenue Accounts

Credit

+

(1) Increase Side

(3) Normal Balance

Debit

–

(2) Decrease Side

Rules for Expense Accounts

Expenses decrease owner’s capital.

Rules for Expense Accounts

Expenses decrease owner’s capital.

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Expense Accounts

Credit

–

(2) Decrease Side

Debit

+

(1) Increase Side

(3) Normal Balance

Rules for the Withdrawals Account

A withdrawal is an amount of money or an asset the owner takes out of the business.

Rules for the Withdrawals Account

A withdrawal is an amount of money or an asset the owner takes out of the business.

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

Withdrawals Accounts

Credit

–

(2) Decrease Side

Debit

+

(1) Increase Side

(3) Normal Balance

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions

What You’ll Learn

How to analyze transactions that

affect revenue, expense, and

withdrawals accounts

What You’ll Learn

How to analyze transactions that

affect revenue, expense, and

withdrawals accounts

Why It’s Important

You need to analyze revenue,

expense, and owner’s withdrawal

transactions to record them

correctly.

Why It’s Important

You need to analyze revenue,

expense, and owner’s withdrawal

transactions to record them

correctly.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Key Terms

revenue recognition

Key Terms

revenue recognition

Business Transaction 8

ANALYSIS Identify 1. The accounts Cash in Bank and Delivery Revenue are affected.

Classify 2. Cash in Bank is an asset account. Delivery Revenue is a revenue account.

+ / – 3. Cash in Bank is increased by $1,200. Delivery Revenue is increased by $1,200.

On October 15, Roadrunner provided delivery service for the Sims Corporation. A check for $1,200 was received in full payment.

Analyzing TransactionsAnalyzing Transactions

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 8 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $1,200.

5. Increases in revenue accounts are recorded as credits. Credit Delivery Revenue for $1,200.

On October 15, Roadrunner provided delivery service for the Sims Corporation. A check for $1,200 was received in full payment.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 8 (cont'd.)

T ACCOUNTS 6.

On October 15, Roadrunner provided delivery service for the Sims Corporation. A check for $1,200 was received in full payment.

DeliveryCash in Bank Revenue

Debit

+

1,200

Credit

+

1,200

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Credit

–

Debit

–

Business Transaction 9

ANALYSIS Identify 1. The accounts Rent Expense and Cash in Bank are affected.

Classify 2. Rent Expense is an expense account. Cash in Bank is an asset account.

+ / – 3. Rent Expense is increased by $700. Check in Bank is decreased by $700.

On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 9 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Rent Expense for $700.

5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $700.

On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 9 (cont'd.)

T ACCOUNTS 6.

On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.

Rent Expense Cash in Bank

Debit

+

700

Credit

–

700

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Credit

–

Debit

+

Business Transaction 10

ANALYSIS Identify 1. The accounts Advertising Expense and Accounts Payable —Beacon Advertising are affected.

Classify 2.Advertising Expense is an expense account. Accounts Payable—Beacon Advertising is a liability account.

+ / – 3.Advertising Expense is increased by $75. Accounts Payable— Beacon Advertising is increased by $75.

On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 10 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Advertising Expense for $75.

5. Increases in liability accounts are recorded as credits. Credit Accounts Payable—Beacon Advertising for $75.

On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 10 (cont'd.)

T ACCOUNTS 6.

On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.

Advertising Accounts Payable—Expense Beacon Advertising

Debit

+

75

Credit

+

75

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Credit

–

Debit

–

Testing for the Equality of Debits and CreditsTesting for the Equality of Debits and Credits

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Step 1 Make a list of the account titles used by the business.

Step 1 Make a list of the account titles used by the business.

Step 2 To the right of each account title, list the balance of the account. Use two columns, one for debit balances and the other for credit balances.

Step 2 To the right of each account title, list the balance of the account. Use two columns, one for debit balances and the other for credit balances.

Step 3 Add the amounts in each column.Step 3 Add the amounts in each column.

Testing for the Equality of Debits and Credits (cont'd.)Testing for the Equality of Debits and Credits (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

DEBIT CREDITACCOUNT NAME BALANCES BALANCES101 Cash in Bank $ 21,125105 Accounts Receivable--City News 1,450110 Accounts Receivable--Green Company115 Computer Equipment 3,000120 Office Equipment 200125 Delivery Equipment 12,000201 Accounts Payable--Beacon Advertising $ 75205 Accounts Payable--North Shore Auto 11,650301 Maria Sanchez, Capital 25,400302 Maria Sanchez, Withdrawals 500303 Income Summary401 Delivery Revenue 2,650501 Advertising Expense 75505 Maintenance Expense 600510 Rent Expense 700515 Utilities Expense 125

$ 39,775 $ 39,775

101 Cash in Bank $ 21,125105 Accounts Receivable--City News 1,450110 Accounts Receivable--Green Company115 Computer Equipment 3,000120 Office Equipment 200125 Delivery Equipment 12,000201 Accounts Payable--Beacon Advertising $ 75205 Accounts Payable--North Shore Auto 11,650301 Maria Sanchez, Capital 25,400302 Maria Sanchez, Withdrawals 500303 Income Summary401 Delivery Revenue 2,650501 Advertising Expense 75505 Maintenance Expense 600510 Rent Expense 700515 Utilities Expense 125

$ 39,775 $ 39,775

Check Your UnderstandingCheck Your Understanding

1. What is the normal balance of a

withdrawals account? Answer:

debit

1. What is the normal balance of a

withdrawals account? Answer:

debit

2. What other temporary account

carries a normal balance on the

same side as the normal balance

for a withdrawals account?

Answer: expenses

2. What other temporary account

carries a normal balance on the

same side as the normal balance

for a withdrawals account?

Answer: expenses

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions

What You’ll Learn

How to analyze transactions that

affect revenue, expense, and

withdrawals accounts

What You’ll Learn

How to analyze transactions that

affect revenue, expense, and

withdrawals accounts

Why It’s Important

You need to analyze revenue,

expense, and owner’s withdrawal

transactions to record them

correctly.

Why It’s Important

You need to analyze revenue,

expense, and owner’s withdrawal

transactions to record them

correctly.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Key Terms

revenue recognition

Key Terms

revenue recognition

Business Transaction 8

ANALYSIS Identify 1. The accounts Cash in Bank and Delivery Revenue are affected.

Classify 2. Cash in Bank is an asset account. Delivery Revenue is a revenue account.

+ / – 3. Cash in Bank is increased by $1,200. Delivery Revenue is increased by $1,200.

On October 15, Roadrunner provided delivery service for the Sims Corporation. A check for $1,200 was received in full payment.

Analyzing TransactionsAnalyzing Transactions

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 8 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $1,200.

5. Increases in revenue accounts are recorded as credits. Credit Delivery Revenue for $1,200.

On October 15, Roadrunner provided delivery service for the Sims Corporation. A check for $1,200 was received in full payment.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 8 (cont'd.)

T ACCOUNTS 6.

On October 15, Roadrunner provided delivery service for the Sims Corporation. A check for $1,200 was received in full payment.

DeliveryCash in Bank Revenue

Debit

+

1,200

Credit

+

1,200

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Credit

–

Debit

–

Business Transaction 9

ANALYSIS Identify 1. The accounts Rent Expense and Cash in Bank are affected.

Classify 2. Rent Expense is an expense account. Cash in Bank is an asset account.

+ / – 3. Rent Expense is increased by $700. Check in Bank is decreased by $700.

On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 9 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Rent Expense for $700.

5. Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $700.

On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 9 (cont'd.)

T ACCOUNTS 6.

On October 16, Roadrunner mailed Check 103 for $700 to pay the month’s rent.

Rent Expense Cash in Bank

Debit

+

700

Credit

–

700

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Credit

–

Debit

+

Business Transaction 10

ANALYSIS Identify 1. The accounts Advertising Expense and Accounts Payable —Beacon Advertising are affected.

Classify 2.Advertising Expense is an expense account. Accounts Payable—Beacon Advertising is a liability account.

+ / – 3.Advertising Expense is increased by $75. Accounts Payable— Beacon Advertising is increased by $75.

On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 10 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Advertising Expense for $75.

5. Increases in liability accounts are recorded as credits. Credit Accounts Payable—Beacon Advertising for $75.

On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Analyzing Transactions (cont'd.)Analyzing Transactions (cont'd.)

Business Transaction 10 (cont'd.)

T ACCOUNTS 6.

On October 18, Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay Beacon’s $75 fee later.

Advertising Accounts Payable—Expense Beacon Advertising

Debit

+

75

Credit

+

75

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Credit

–

Debit

–

Testing for the Equality of Debits and CreditsTesting for the Equality of Debits and Credits

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Step 1 Make a list of the account titles used by the business.

Step 1 Make a list of the account titles used by the business.

Step 2 To the right of each account title, list the balance of the account. Use two columns, one for debit balances and the other for credit balances.

Step 2 To the right of each account title, list the balance of the account. Use two columns, one for debit balances and the other for credit balances.

Step 3 Add the amounts in each column.Step 3 Add the amounts in each column.

Testing for the Equality of Debits and Credits (cont'd.)Testing for the Equality of Debits and Credits (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

DEBIT CREDITACCOUNT NAME BALANCES BALANCES101 Cash in Bank $ 21,125105 Accounts Receivable--City News 1,450110 Accounts Receivable--Green Company115 Computer Equipment 3,000120 Office Equipment 200125 Delivery Equipment 12,000201 Accounts Payable--Beacon Advertising $ 75205 Accounts Payable--North Shore Auto 11,650301 Maria Sanchez, Capital 25,400302 Maria Sanchez, Withdrawals 500303 Income Summary401 Delivery Revenue 2,650501 Advertising Expense 75505 Maintenance Expense 600510 Rent Expense 700515 Utilities Expense 125

$ 39,775 $ 39,775

101 Cash in Bank $ 21,125105 Accounts Receivable--City News 1,450110 Accounts Receivable--Green Company115 Computer Equipment 3,000120 Office Equipment 200125 Delivery Equipment 12,000201 Accounts Payable--Beacon Advertising $ 75205 Accounts Payable--North Shore Auto 11,650301 Maria Sanchez, Capital 25,400302 Maria Sanchez, Withdrawals 500303 Income Summary401 Delivery Revenue 2,650501 Advertising Expense 75505 Maintenance Expense 600510 Rent Expense 700515 Utilities Expense 125

$ 39,775 $ 39,775

Check Your UnderstandingCheck Your Understanding

1. What is the normal balance of a

withdrawals account?

1. What is the normal balance of a

withdrawals account?

2. What other temporary account

carries a normal balance on the

same side as the normal balance

for a withdrawals account?

2. What other temporary account

carries a normal balance on the

same side as the normal balance

for a withdrawals account?

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)

Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.)