Patchogue-Medford High School
Accounting I – Chapter 5 Notes
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:
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
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)
- Make a list of all of the accounts used that have a balance in numerical order.
- To the right of each account name put their balance in either the debit or credit column.
- 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
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