CHAPTER 5

TRANSACTIONS THAT AFFECT REVENUE,

EXPENSES, AND WITHDRAWALS

What Youll Learn

Explain the difference between permanent accounts and
temporary accounts.
List and apply the rules of debit and credit for revenue,
expense, and withdrawals accounts.
Use the six-step method to analyze transactions affecting
revenue, expense, and withdrawals accounts.
Test a series of transactions for equality of debits and
credits.
Define the accounting terms introduced in this chapter.
RELATIONSHIP OF REVENUE, EXPENSES,
AND WITHDRAWALS TO OWNERS EQUIT Y

Main Idea
Revenues, expenses, and withdrawals are temporary accounts.
They start each new accounting period with zero balances.

You Will Learn

how temporary account transactions change owners equity.
the rules of debit and credit for temporary accounts.
RELATIONSHIP OF REVENUE, EXPENSES,
AND WITHDRAWALS TO OWNERS EQUIT Y

What Do You Think?

If temporary accounts begin each period with zero balances, what
do you think happened to the balance from the prior period?
It was transferred to owners capital account

If a transaction affects revenue, will owners equity automatically

be affected?

Yes
Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Key Terms
temporary accounts
permanent accounts
 ACTIVATING PRIOR KNOWLEDGE

Which transaction types increase owners equity?

Which transaction types decrease owners equity?

Owners Capital

Expenses Revenue
Withdrawals Investments
by the owner
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Temporary and Permanent Accounts

Revenues, expenses, and withdrawals could be recorded as
increases or decreases in the capital account.
This method makes classifying information from these
transactions difficult

A better way to record these transactions is to set up

separate accounts for each type of revenue or expense.
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Using Temporary Accounts

Use temporary accounts to temporarily record information
for revenues, expenses and withdrawals.

Temporary accounts:
start the accounting period with a zero balance
accumulate amounts for one accounting period
transfer the balance to the owners capital account at the
end of the period.
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Using Temporary Accounts

Look at figure 5-1 . Does the total amount for utilities
expense increase or decrease owners capital?
Decrease

If a revenue account were illustrated, would its total

increase or decrease owners capital?
Increase
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Using Temporary Accounts

If expenses of $15,350 and revenues of $60,335 were
transferred to the Owners Capital account with a
beginning normal balance of $43,335, what is the new
balance?
$88,320
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Using Permanent Accounts

In contrast to temporary accounts, permanent accounts
continue accumulating from one accounting period to the
next.

The owners capital account and the asset and liability

accounts are permanent accounts.

Permanent accounts show:

the balances on hand or amounts owed at any time
the day-to-day account changes.
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

The Rules of Debit and Credit for Temporary Accounts

Review the T account showing the rules of debit and credit for
the owners capital account:
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Rules for Revenue Accounts

These rules of debit and credit are used for revenue accounts:
A revenue account is increased on the credit side.
A revenue account is decreased on the debit side.
The normal balance for a revenue account is the increase
or the credit side. Revenue accounts normally have credit
balances.
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Rules for Expense Accounts

These rules of debit and credit are used for expense
accounts:
An expense account is increased on the
debit side.
An expense account is decreased on the
credit side.
The normal balance for an expense account is the
increase or the debit side. Expense accounts normally
have debit balances.
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Rules for Expense Accounts

 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Rules for Expense Accounts

If a business incurred more expenses than it earned in
revenues, and no beginning balance existed in the Owners
Capital account, would the account end the period with a
normal balance?
No. The account would end the period with a debit
balance.
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Rules for Withdrawals Accounts

These rules of debit and credit are used for withdrawals
accounts:
A withdrawals account is increased on the
debit side.
A withdrawals account is decreased on the
credit side.
The normal balance for a withdrawals account is the
increase or the debit side. Withdrawals accounts normally
have debit balances.
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Rules for Withdrawals Accounts

What happens when a business owner takes home some of
the inventory of the business? Does the business now have
fewer assets?
Yes

Is the owners claim to assets now less?

Yes. Owners capital has been decreased with this
withdrawal
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Rules for Withdrawals Accounts

 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Summary of the Rules of Debit and Credit for Temporary

Accounts
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Reinforce The Main Idea

Normal debit balance:
Permanent: Assets
Temporary: Expenses, Withdrawals

Normal credit balance:

Permanent: Liabilities
Temporary: Revenue
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Do The Math
Effect on owners equity: $2,050

(owners capital $1,200 withdrawal $650 + sales

revenue $5,000 advertising and salaries expenses
$3,500
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Problem 5-1
Cash in Bank: asset, debit, credit, debit
Accts Receivable: asset, debit, credit, debit
Airplanes: asset, debit, credit, debit
Accts Payable: liability, credit, debit, credit
Caroline Palmer, Capital: owners equity, credit, debit, credit
Caroline Palmer, Withdrawals: owners equity, debit, credit,
debit
Flying Fees: revenue, credit, debit, credit
Advert. Expense: expense, debit, credit, debit
Food Expense: expense, debit, credit, debit
Fuel and Oil Expense: expense, debit, credit, debit
Repairs Expense: expense, debit, credit, debit
 Relationship of Revenue, Expenses, and
Withdrawals to Owners Equity

Key Terms Review

temporary accounts
Accounts used to collect information that will be
transferred to a permanent capital account at the end of
the accounting period (i.e. revenue, expense, and the
owners withdrawals account)
permanent accounts
Accounts that are continuous from one accounting period
to the next; balances are carried forward to the next period
(i.e. assets, liabilities, and the owners capital account)
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Main Idea
Double-entry accounting requires that total debits and total
credits are always equal.

You Will Learn

how to analyze revenue, expense, and owners withdrawals
transactions.
how to confirm that total debits and total credits are equal in
the ledger.
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Key Term
revenue recognition
 SECTION 2
APPLYING THE RULES OF DEBIT AND CREDIT TO
REVENUE, EXPENSE, AND WITHDRAWALS TRANSACTIONS

What Do You Think?

Why should all debits equal all credits in an accounting system?

To check errors in recording transactions

Examine the steps of analysis. What might happen if you fail to

think through these steps as you analyze transactions?

You can forget to identify an affected account or make an

error in debit-credit rules
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
 APPLYING THE RULES OF DEBIT AND CREDIT TO
REVENUE, EXPENSE, AND WITHDRAWALS TRANSACTIONS

Business Transaction 9
If Roadrunner pays $700 a month in rent, how much does the
company pay in a year?
$8,400
 APPLYING THE RULES OF DEBIT AND CREDIT TO
REVENUE, EXPENSE, AND WITHDRAWALS TRANSACTIONS

Business Transaction 10
How does this transaction affect owners equity?
Expenses decrease owners equity

Are assets affected by this business transaction?

No. Liabilities and owners equity are affected
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Using the rules of debit and credit, analyze some business
transactions that af fect revenue, expense, and owners withdrawals
accounts:
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions
Analyzing Transactions
Transaction 11 follows the GAAP principle of revenue recognition
(recording revenue on the date earned):
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Transaction 11 follows the GAAP principle of revenue recognition
(recording revenue on the date earned):
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Transaction 11 follows the GAAP principle of revenue recognition
(recording revenue on the date earned):
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions
Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions
Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Analyzing Transactions
 APPLYING THE RULES OF DEBIT AND CREDIT TO
REVENUE, EXPENSE, AND WITHDRAWALS TRANSACTIONS

Business Transaction 13 and 14

How do these transactions affect owners equity?
Both transactions decrease owners equity

Business Transaction 14
How is this transaction represented using the accounting equation?
-$500 = -$500
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Testing for the Equality of Debits and Credits

Test for the equality of debits and credits to verify you have not
made errors.

Follow these steps to test for the equality of debits and credits:
Make a list of account names.
Next to each account, list the account balance in either the
debit or credit column.
Add the amounts in each column.
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Testing for the Equality of Debits and Credits

 Chapter 5 Review

Problem 1
On October 24 Larry Nevers, the owner of Aqua Pool, took
$1 ,000 out of the business for personal use.

Using the Business Transaction Analysis method, list the

steps you would use to record this transaction.

Assume that accounts for Cash in Bank and Larry Nevers,

Withdrawals exist.
 Chapter 5 Review

Answer 1
Step 1: Identify the accounts af fected.
The accounts Larry Nevers, Withdrawals and Cash in Bank are affected.

Step 2: Classify the accounts af fected.

Larry Nevers, Withdrawals is an owners equity account.
Cash in Bank is an asset account.

Step 3: Determine the amount of increase or decrease for each account

af fected.
Larry Nevers, Withdrawals is increased by $1,000.
Cash in Bank is decreased by $1,000.

Step 4: Which account is debited and for what amount?

Increases in the owners withdrawal account are recorded as debits.
Debit Larry Nevers, Withdrawals for $1,000.

Step 5: Which account is credited and for what amount?

Decreases in asset accounts are recorded as credits.
Credit Cash in Bank for $1,000.
 Chapter 5 Review

Question 2
Why do expense accounts have a normal debit balance if they
are temporary capital accounts and owners capital accounts,
which are permanent accounts, have a credit balance?

Expenses are the cost of doing business and therefore as

expenses increase, owners equity decreases. Owners capital
accounts decrease with a debit; therefore, increases in
expenses are recorded as debits.
Applying the Rules of Debit and Credit to Revenue,
Expense, and Withdrawals Transactions

Key Term Review

revenue recognition
The GAAP principle that revenue is recorded on the date it
is earned even if cash has not been received.