Bellringer What is the first transaction in opening up a business? Why do people start a business? What types of activities occur to operate your business? How do businesses survive or stay in business? Write down on a piece of paper…

Essential Questions Why do revenue, expenses, and owner’s withdrawals affect owner’s equity? How are they a part of the accounting equation? How do you analyze transactions that relate to revenues, expenses and withdrawals?

Enduring Understanding Revenues and Expenses and withdrawals are temporary accounts. They start each new accounting period with -0- balances.

Students will be able to: Describe the purposes of the revenue, expense and drawing accounts and illustrate their effects on owner’s equity. Compare and Contrast Temporary and Permanent accounts. Explain the double-entry system of accounting and apply debit and credit rules when analyzing business transactions.

Why do people start a business? What types of activities occur to operate your business? Revenue income earned from the sale of goods Increases owner’s equity, the value of your business

What types of activities occur to operate your business? How do business’ survive or stay in business? Expenses cost of products or services used to operate a business Decreases owner’s equity, the value of your business

What is the first transaction in opening up a business? What types of activities occur to operate your business ? Withdrawals Investments in the Business An amount of money or an asset the owner contributes to the business Increases Owner’s Equity, Value of business Owner took $25,000 from personal savings and deposited into business bank checking account Owner took a computer from her home and transferred it to the business as office equipment An amount of money or an asset the owner takes out of the business Decreases Owner’s Equity, Value of business Owner wrote a check to withdraw $5,000 cash for personal use Owner took one computer for his personal use at home.

How do business’ survive or stay in business? Accounting Period: Period of time covered by an accounting report. Monthly – Jan 1 thru Jan 31 st. Quarterly – Jan 1 thru March 31 st. Yearly – Jan 1 thru December 31 st. Revenues > Expenses = Net Income + Revenues < Expenses = Net Loss -

TEMPORARY ACCOUNTS Accounts used to collect information for a single accounting period Examples: Revenues, Expenses and Withdrawals $ amount end of accounting period moves to owner’s equity. Start each new accounting period with zero balances.

PERMANENT ACCOUNTS – “Real Accounts” Accounts that have continuous balances from one accounting period to the next. Examples: Assets, Liabilities and Owner’s Equity The $ amount at the end of one accounting period becomes the $ amount for the beginning accounting period.

Temporary Accounts Vs. Permanent accounts Delivery Revenue: Balance 1/1/2010 $ 0 Sales for the year $100,000 Balance 12/31/10 $100,000 Zero account out -$100,000 Balance 1/1/2011 $0 Owner’s Equity: Balance 1/1/2010 $ 0 Owner’s investment $25,000 Balance Rev 12/31/10 $100,000 Balance 12/31/10 $125,000 Balance 1/1/2011 $125,000

Temporary Accounts Vs. Permanent accounts Utilities Expense: Balance 1/1/2010 $ 0 Expense for the year $75,000 Balance 12/31/10 $75,000 Zero account out -$75,000 Balance 1/1/2011 $0 Owner’s Equity: Balance 1/1/2010 $ 0 Owner’s investment +25,000 Balance Rev 12/31/ ,000 Balance Exp 12/31/ ,000 Balance 12/31/10 $50,000 Balance 1/1/2011 $50,000

Temporary Accounts Vs. Permanent accounts Maria Sanchez, Withdrawal: Balance 1/1/2010 $ 0 Withdrawals for the year $5,000 Balance 12/31/10 $5,000 Zero account out -$5,000 Balance 1/1/2011 $0 Owner’s Equity: Balance 1/1/2010 $ 0 Owner’s investment + 25,000 Balance Rev 12/31/ ,000 Balance Exp 12/31/ ,000 Bal Withdrawal 12/31/10 - 5,000 Balance 12/31/10 $45,000 Balance 1/1/2011 $45,000

How are they a part of the accounting equation? Assets = Liabilities + Owner’s Equity + Revenue – Expense- Withdrawals

T-Accounts Permanent Account Capital Debit - Decrease side Credit + Increase side Balance side Revenue Debit - Decrease side Credit + Increase side

Rules for Revenue Accounts 1. A revenue account is increased (+) on the credit side. 2. A revenue account is decreased (-) on the debit side. 3. The normal balance for an revenue account is a credit balance. Assets = liabilities + owner’s equity + revenue – expenses- withdrawals Revenue Debit - Decrease side- Credit + Increase side Balance side Fees Debit - $200 Credit + $500 1,000 2,000 Balance $3,300

REMEMBER The normal balance side of any account is the same as the side used to increase that account.

Rules for Expense Accounts 1. The expense accounts are increased (+) on the debit side. 2. The expense accounts are decreased (-) on the credit side. 3. The normal balance for the expense accounts is a debit balance. Expense Accounts Debit + Increase side Balance side Credit - Decrease side Advertising Expense Debit Balance $475 Credit - 125

Assets = Liabilities + Owner’s Equity + Revenue – Expense- Withdrawals Permanent Account Capital Debit - Decrease side Credit + Increase side Balance side Expenses Revenue Debit + Increase side Balance side Credit - Decrease side Debit - Decrease side Credit + Increase side Balance side

Rules for Withdrawals Account The withdrawals account is increased by debits The withdrawals account is decreased by credits. The normal balance for the withdrawals account is a debit balance. Withdrawals Debit + Increase side Balance side Credit - Decrease side

Check your learning 1. What is the normal balance side of any account? 2. What effect does a debit have on an expense account? 3. What is the normal balance for a revenue account? 4. What effect does a credit have on a revenue account? 5. What is the normal balance for an expense account? 6. What effect does a credit have on a withdrawals account? 7. What is the normal balance for a withdrawals account?

Permanent Account Capital Debit - Decrease Expenses Withdrawals Debit + Increase side Credit - Decrease side Debit + Increase side Credit - Decrease side Credit + Increase side Balance side Revenue Credit + Increase side Balance side Debit - Decrease side

Remember Expenses decrease owner’s capital. As a result, increases in expenses are recorded as debits and the normal balance of an expense account is a debit balance. Amounts taken out of the business decrease owner’s capital. Therefore, increases in the withdrawals account are recorded as debits.

Testing for the Equality of Debits and Credits Make a list of the account titles used by the business. Opposite each account title, list the final or current balance of the account. Use two columns, one for debit balances and one for credit. Add each amount column.