Chapter 5Chapter 5

Transactions That Affect Transactions That Affect Revenue, Expenses, and Revenue, Expenses, and

WithdrawalsWithdrawals

VocabularyVocabulary

OLDOLD

RevenueRevenue

ExpensesExpenses

WithdrawalsWithdrawals

NEWNEW

Temporary Capital Temporary Capital AccountsAccounts

Permanent AccountsPermanent Accounts

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Relationship of Revenue, Relationship of Revenue, Expenses, and Withdrawals to Expenses, and Withdrawals to

Owner’s EquityOwner’s Equity

Owner’s Capital account shows the Owner’s Capital account shows the amount of the owner’s investment, or amount of the owner’s investment, or equity (what the business is worth $$ if equity (what the business is worth $$ if sold).sold).

Expenses and owner’s withdrawals Expenses and owner’s withdrawals decreasedecrease owner’s equity owner’s equity

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Temporary Capital AccountsTemporary Capital Accounts

Accounting is measured in periods of time or Accounting is measured in periods of time or

accounting periodsaccounting periods Revenue, expense, and withdrawals accounts are Revenue, expense, and withdrawals accounts are used to collect information for a single accounting used to collect information for a single accounting period. period.

Temporary capital accounts start new each period Temporary capital accounts start new each period with zero balances. - The balance does NOT carry with zero balances. - The balance does NOT carry forwardforward

At the end of that period, the balances in the At the end of that period, the balances in the temporary capital accounts are transferred to the temporary capital accounts are transferred to the owner’s capital account.owner’s capital account.

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During the accounting period, transactions During the accounting period, transactions related to utilities such as electric and related to utilities such as electric and phone are recorded in Utilities Expense phone are recorded in Utilities Expense accountaccountThe individual transaction amounts The individual transaction amounts accumulate during the periodaccumulate during the periodAt the end of the period, the total is At the end of the period, the total is transferred to owner’s capital and transferred to owner’s capital and subtractedsubtracted

Illustrating Temporary accountsIllustrating Temporary accountsCh 5 Section 1

Utilities Expense

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

Total for accountingperiod $7,998

Owner’s Capital

Balance 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.

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

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Permanent AccountsPermanent Accounts

Owner’s capital accountOwner’s capital account

Asset and liability accountsAsset and liability accounts

Permanent accounts are continuous Permanent accounts are continuous from one accounting period to the next.from one accounting period to the next.

Dollar balances at the end of one Dollar balances at the end of one accounting period becomes the accounting period becomes the beginning dollar balances for the next beginning dollar balances for the next accounting periodaccounting period

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Illustrating Permanent AccountsIllustrating Permanent Accounts

If a business has supplies totaling $875 at If a business has supplies totaling $875 at the end of one accounting period, the the end of one accounting period, the business will start with $875 in supplies at business will start with $875 in supplies at the beginning of the next accounting the beginning of the next accounting period.period.

Permanent accounts show balances on Permanent accounts show balances on hand or amounts owned at any time.hand or amounts owned at any time.

Show day to day changes in assets, Show day to day changes in assets, liabilities, and owner’s capital.liabilities, and owner’s capital.

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Rules of D and Cr for Temp Rules of D and Cr for Temp Capital AccountsCapital Accounts

The rules of debit and credit for accounts The rules of debit and credit for accounts classified as revenue, expense, and classified as revenue, expense, and withdrawals accounts are withdrawals accounts are relatedrelated to the to the rules for the owner’s equity account.rules for the owner’s equity account.

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Revenue Accounts

Credit

+

(1) Increase Side

(3) Normal Balance

Debit

–

(2) Decrease Side

Debit

-

(2) Decrease Side

Rules for Revenue AccountsRules for Revenue Accounts

Revenue earned from selling goods or services will increase owner’s capital

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Expense Accounts

Credit

–

(2) Decrease Side

Debit

+

(1) Increase Side

(3) Normal Balance

Rules for Expense AccountsRules for Expense Accounts

Expenses decrease Owner’s Capital

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Withdrawals Accounts

Credit

–

(2) Decrease Side

Debit

+

(1) Increase Side

(3) Normal Balance

Rules for Expense AccountsRules for Expense Accounts

- Withdrawals are money that that - Withdrawals are money that that owner takes out of the businessowner takes out of the business- Withdrawals decrease Owner’s - Withdrawals decrease Owner’s CapitalCapital

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ReviewReview

1. Changes to revenue accounts eventually affect another account. What other account is affected? Explain

2. What type of transaction affects the debit side of the owner’s capital account? Explain