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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 goodsIncreases 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 businessDecreases 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?
WithdrawalsInvestments 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 31st.Quarterly – Jan 1 thru March 31st.Yearly – Jan 1 thru December 31st.
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 12/31/10 +100,000
Balance Exp 12/31/10 - 75,000
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 12/31/10 +100,000
Balance Exp 12/31/10 - 75,000
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-AccountsPermanent 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 sideBalance 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 sideBalance side
Credit-Decrease side
Advertising Expense
Debit +400200Balance $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.
