Presentation on theme: "Transactions That Affect Revenue, Expenses, and Withdrawals"— Presentation transcript:
1 Transactions That Affect Revenue, Expenses, and Withdrawals Chapter 5Transactions That Affect Revenue, Expenses, and Withdrawals
2 Vocabulary OLD Revenue Expenses Withdrawals NEW Ch 5 Section 1OLDRevenueExpensesWithdrawalsNEWTemporary Capital AccountsPermanent AccountsRevenue – Money earned from selling goods and servicesExpenses – The money used to run the businessWithdrawals – Money taken out of the business by the ownerTemporary Capita accounts – balance transferred to capital account and the end of the period and start new each period with zero balance.Permanent accounts – continuous from one accounting period to the next. Dollar balances carry forward.
3 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity Ch 5 Section 1Relationship of Revenue, Expenses, and Withdrawals to Owner’s EquityOwner’s Capital account shows the amount of the owner’s investment, or equity (what the business is worth $$ if sold).Expenses and owner’s withdrawals decrease owner’s equity
4 Temporary Capital Accounts Ch 5 Section 1Accounting is measured in periods of time or accounting periodsRevenue, expense, and withdrawals accounts are used to collect information for a single accounting period.Temporary capital accounts start new each period with zero balances. - The balance does NOT carry forwardAt the end of that period, the balances in the temporary capital accounts are transferred to the owner’s capital account.
5 Illustrating Temporary accounts Ch 5 Section 1During the accounting period, transactions related to utilities such as electric and phone are recorded in Utilities Expense accountThe individual transaction amounts accumulate during the periodAt the end of the period, the total is transferred to owner’s capital and subtracted
6 The Relationship of Temporary Capital Accounts to the Owner’s Capital Account Ch 5 Section 1Utilities ExpenseAccumulated telephonecosts for accountingperiod $2,857Accumulated electricityperiod 5,141Total for accountingperiod $7,998Utilities Expense balance transferred to Owner’s Capital at end of accounting period. Expenses decrease owner’s capital.Owner’s CapitalBalance of UtilitiesExpense $7,998Balance at Beginning ofAccounting Period $90,000Balance at End ofAccounting Period $82,002
7 Permanent Accounts Owner’s capital account Ch 5 Section 1Permanent AccountsOwner’s capital accountAsset and liability accountsPermanent accounts are continuous from one accounting period to the next.Dollar balances at the end of one accounting period becomes the beginning dollar balances for the next accounting period
8 Illustrating Permanent Accounts Ch 5 Section 1If a business has supplies totaling $875 at the end of one accounting period, the business will start with $875 in supplies at the beginning of the next accounting period.Permanent accounts show balances on hand or amounts owned at any time.Show day to day changes in assets, liabilities, and owner’s capital.
9 Rules of D and Cr for Temp Capital Accounts Ch 5 Section 1The rules of debit and credit for accounts classified as revenue, expense, and withdrawals accounts are related to the rules for the owner’s equity account.
10 Rules for Revenue Accounts Ch 5 Section 1Rules for Revenue AccountsRevenue earned from selling goods or services will increase owner’s capitalRevenue AccountsDebit-(2) Decrease SideDebit–(2) Decrease SideCredit+(1) Increase Side(3) Normal Balance
11 Rules for Expense Accounts Ch 5 Section 1Rules for Expense AccountsExpenses decrease Owner’s CapitalExpense AccountsDebit+(1) Increase Side(3) Normal BalanceCredit–(2) Decrease Side
12 Rules for Expense Accounts Ch 5 Section 1Rules for Expense Accounts- Withdrawals are money that that owner takes out of the business- Withdrawals decrease Owner’s CapitalWithdrawals AccountsDebit+(1) Increase Side(3) Normal BalanceCredit–(2) Decrease Side
13 Review1. Changes to revenue accounts eventually affect another account. What other account is affected? Explain2. What type of transaction affects the debit side of the owner’s capital account? Explain1. Capital. Revenue represents increases to capital from selling goods or services2. Expenses and withdrawal decrease capital and represent the left, debit side of the capital account.