Patchogue-Medford High School

Accounting I – Chapter 5 Notes

Mr. Butzke

Chapter 5 – Transactions that affect Revenue, Expenses & Withdrawals                                                                                                                          Page 104

Objective: Students will be able to demonstrate their knowledge of classifying transactions to either temporary or permanent accounts. They will apply the rules of debits and credits to each transaction while using the six-step method to analyze each transaction.

It is important to understand the relationship of revenues to expenses, and withdrawals to capital.

Under the Matching Concept, revenues and expenses are recorded in the period that they are earned and incurred. Expenses must be recorded in the period that the revenue is reported.

Revenue – Money that is earned by the selling of a product or service. This increase profits.

Expenses – Costs used to generate revenue and operate the business. They must be recorded when they are used or the revenue is received. These decrease profits.

This is how they are shown:

                                             Revenue

                                    Less: Expenses

                                             Profit or Net Income

All accounts are considered either Temporary or Permanent.

Temporary Capital Accounts – These accounts would be used for a maximum one-year period. Each year they would start out with a zero balance, the previous year’s activity would be zeroed out. These accounts are the revenue and expense accounts with the one exception of the balance sheet account withdrawals, (also a temporary account). The revenue and expenses are the accounts that make up the Income Statement.

Permanent Accounts – These accounts are continuous from period to period, year to year. They contain transaction from day one. These accounts are the asset, liability, and capital accounts. These accounts are used to produce the Balance Sheet.

Debit and Credit Rules (page 109-111)                                                  First

                                                       Natural       Temporary/    F/S          Digiit

                  Increase      Decrease     Balance       Permanent   I/S or B/S    in Acct #

Asset              Dr.                      Cr.                  Dr.              P           B/S                        1

Liability           Cr.              Dr.                          Cr.                P          B/S                       2

Equity

    Capital         Cr.              Dr.                          Cr.               P           B/S                       3

    Withdrawal  Dr.                      Cr.                  Dr.              T           B/S                       3

Revenue          Cr.              Dr.                          Cr.               T           I/S               4

Expense          Dr.                      Cr.                  Dr.              T           I/S              6  & 7

         (Problem 5-1, Applying the rules of Dr. & Cr., pg 113, work book pg 42)

Review the revenue, expense, and capital transactions, 8-14, on pages 114-117.

Once the transactions are recorded you need to test for the equality of the Debits and Credits. You do this by preparing a TRIAL BALANCE.

Trial Balance – a chronological listing of ALL accounts with a balance that is added up to show debits = credits. Amounts are entered into either the debit column or credit column. (page 118)

1. Make a list of all of the accounts used that have a balance in numerical order.
2. To the right of each account name put their balance in either the debit or credit column.
3. Add the debit and then the credit columns and put the total on the bottom. The two columns must agree with the same total. Using a double entry system, this should always work.

Trial Balance Format:

Account Number       Account Title                 Debit           Credit

(Problem 5-2, Identifying accounts affected, pg 119, work book pg 42)

Terms Page 121

Questions Page 122

Problems

Prob.  5-3     Inc/Dec in accounts                TB pg 124   WB pg 43    PC 49

Prob.  5-4     T-Accts to Analyze                  TB pg 124   WB pg 43    PC 52

Prob.  5-5     Dr. & Cr. Parts                       TB pg 125   WB pg 44    PC 52                  Q 57

Prob.  5-6     Transactions, Dr & Cr             TB pg 126   WB pg 45    PC 55

Prob.  5-7     Analyze Transaction                TB pg 127    WB pg 47   PC 56

Prob.  5-8     Completing Acct Equation        TB pg 128   WB pg 48                     Q 62