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Transactions That Affect Revenue, Expenses, and Withdrawals What You’ll Learn  The rules of debit and credit for the revenue, expense, and withdrawals.

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Presentation on theme: "Transactions That Affect Revenue, Expenses, and Withdrawals What You’ll Learn  The rules of debit and credit for the revenue, expense, and withdrawals."— Presentation transcript:

1 Transactions That Affect Revenue, Expenses, and Withdrawals What You’ll Learn  The rules of debit and credit for the revenue, expense, and withdrawals accounts.  The reason for having temporary and permanent accounts. What You’ll Learn  The rules of debit and credit for the revenue, expense, and withdrawals accounts.  The reason for having temporary and permanent accounts.

2 Revenue Recognition GAAP Principle  Revenue should be recognized on the date earned, even if cash has not been received GAAP Principle  Revenue should be recognized on the date earned, even if cash has not been received

3 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.) Revenue Accounts Credit + (1) Increase Side (3) Normal Balance Debit – (2) Decrease Side

4 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.) Expense Accounts Credit – (2) Decrease Side Debit + (1) Increase Side (3) Normal Balance

5 Rules for the Withdrawals Account A withdrawal is an amount of money or an asset the owner takes out of the business. Withdrawals decrease the owner’s capital. Rules for the Withdrawals Account A withdrawal is an amount of money or an asset the owner takes out of the business. Withdrawals decrease the owner’s capital. 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

6 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. Delivery Cash in BankRevenue Debit + 1,200 Credit + 1,200 Section 2Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.) Credit – Debit –

7 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 ExpenseCash in Bank Debit Credit – 700 Section 2Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.) Credit – Debit +

8 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. AdvertisingAccounts Payable— ExpenseBeacon Advertising Debit + 75 Credit + 75 Section 2Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.) Credit – Debit –

9 Permanent Accounts  Permanent accounts are continuous from one accounting period to the next.  Permanent accounts:  Owner’s capital account  Asset and liability accounts Permanent Accounts  Permanent accounts are continuous from one accounting period to the next.  Permanent accounts:  Owner’s capital account  Asset and liability accounts Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

10 Permanent Accounts  Permanent accounts start each new accounting period with the beginning balance equal to the ending balance of the previous accounting period. Permanent Accounts  Permanent accounts start each new accounting period with the beginning balance equal to the ending balance of the previous accounting period. Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

11 Temporary Accounts  Temporary accounts are used to collect information for a single accounting period.  Temporary capital accounts:  Revenue  Expense  Withdrawals Temporary Accounts  Temporary accounts are used to collect information for a single accounting period.  Temporary capital accounts:  Revenue  Expense  Withdrawals Section 1Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

12 Temporary Accounts (cont)  At the end of that period, the balances in the temporary capital accounts are transferred to the owner’s capital account.  Temporary accounts start each new accounting period with a zero balance. Temporary Accounts (cont)  At the end of that period, the balances in the temporary capital accounts are transferred to the owner’s capital account.  Temporary accounts start each new accounting period with a zero balance. Section 1Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

13 Utilities The Relationship of Temporary Capital Accounts to the Owner’s Capital Account Show on board how the temporary accounts close into the owner’s capital account. The Relationship of Temporary Capital Accounts to the Owner’s Capital Account Show on board how the temporary accounts close into the owner’s capital account. Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity (cont'd.)

14 The Chart of Accounts Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA CHART OF ACCOUNTS ASSETS101Cash in Bank 105Accounts Receivable--City News 110Accounts Receivable--Green Company 115Computer Equipment 120Office Equipment 125Delivery Equipment LIABILITIES201Accounts Payable--Beacon Advertising 205Accounts Payable--North Shore Auto OWNER’S EQUITY301Maria Sanchez, Capital 302Maria Sanchez, Withdrawals 303Income Summary REVENUE401Delivery Revenue EXPENSES501Advertising Expense 505Maintenance Expense 510Rent Expense 515Utilities Expense Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA CHART OF ACCOUNTS ASSETS101Cash in Bank 105Accounts Receivable--City News 110Accounts Receivable--Green Company 115Computer Equipment 120Office Equipment 125Delivery Equipment LIABILITIES201Accounts Payable--Beacon Advertising 205Accounts Payable--North Shore Auto OWNER’S EQUITY301Maria Sanchez, Capital 302Maria Sanchez, Withdrawals 303Income Summary REVENUE401Delivery Revenue EXPENSES501Advertising Expense 505Maintenance Expense 510Rent Expense 515Utilities Expense

15 The Chart of Accounts A list of all the accounts and their assigned account numbers. Assign #s as follows: 1.Asset accounts begin with a 1 Listed in order of liquidity. 2.Liability accounts begin with a 2 3.Owner equity accounts begin with a 3. 4.Revenue accounts begin with a 4. 5.Expense accounts begin with a 5. The Chart of Accounts A list of all the accounts and their assigned account numbers. Assign #s as follows: 1.Asset accounts begin with a 1 Listed in order of liquidity. 2.Liability accounts begin with a 2 3.Owner equity accounts begin with a 3. 4.Revenue accounts begin with a 4. 5.Expense accounts begin with a 5.

16 Testing for the Equality of Debits and Credits Section 2Applying 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 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.

17 Testing for the Equality of Debits and Credits (cont'd.) Section 2Applying the Rules of Debit and Credit to Revenue, Expense, and Owner’s Equity Transactions (cont'd.) DEBITCREDIT ACCOUNT NAMEBALANCESBALANCES 101Cash in Bank$ 21, Accounts Receivable--City News1, Accounts Receivable--Green Company 115Computer Equipment3, Office Equipment Delivery Equipment12, Accounts Payable--Beacon Advertising$ Accounts Payable--North Shore Auto11, Maria Sanchez, Capital25, Maria Sanchez, Withdrawals Income Summary 401Delivery Revenue2, Advertising Expense75 505Maintenance Expense Rent Expense Utilities Expense125$ 39, Cash in Bank$ 21, Accounts Receivable--City News1, Accounts Receivable--Green Company 115Computer Equipment3, Office Equipment Delivery Equipment12, Accounts Payable--Beacon Advertising$ Accounts Payable--North Shore Auto11, Maria Sanchez, Capital25, Maria Sanchez, Withdrawals Income Summary 401Delivery Revenue2, Advertising Expense75 505Maintenance Expense Rent Expense Utilities Expense125$ 39,775

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


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