Bellringer

1. 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…

2. 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?

3. Enduring Understanding • Revenues and Expenses and withdrawals are temporary accounts. They start each new accounting period with -0- balances.

4. 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.

5. Why do people start a business?What types of activities occur to operate your business? • Revenue • income earned from the sale of goods • Increases owner’s equity, the value of your business

6. 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 business • Decreases owner’s equity, the value of your business

7. What is the first transaction in opening up a business?What types of activities occur to operate your business? Withdrawals Investments 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.

8. 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 -

9. 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.

10. 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.

11. 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

12. 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

13. 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

14. How are they a part of the accounting equation? Assets = Liabilities + Owner’s Equity + Revenue – Expense- Withdrawals

15. T-Accounts Permanent Account Capital Debit - Decrease side Credit + Increase side Balance side Temporary account Revenue Debit - Decrease side Credit + Increase side

16. Rules 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 an revenue account is a credit balance. Assets = liabilities + owner’s equity + revenue – expenses- withdrawals Revenue Fees Credit + $500 1,000 2,000 Balance $3,300 Credit + Increase side Balance side Debit - $200 Debit - Decrease side-

17. REMEMBER The normal balance side of any account is the same as the side used to increase that account.

18. Rules for Expense Accounts • The expense accounts are increased (+) on the debit side. • The expense accounts are decreased (-) on the credit side. • The normal balance for the expense accounts is a debit balance. Advertising Expense Expense Accounts Credit - 125 Debit + 400 200 Balance $475 Debit + Increase side Balance side Credit - Decrease side

19. Assets = Liabilities + Owner’s Equity + Revenue – Expense- Withdrawals Permanent Account Capital Temporary account Temporary account Debit - Decrease side Credit + Increase side Balance side Revenue Expenses Debit - Decrease side Credit + Increase side Balance side Debit + Increase side Balance side Credit - Decrease side

20. 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

21. Check your learning • What is the normal balance side of any account? • What effect does a debit have on an expense account? • What is the normal balance for a revenue account? • What effect does a credit have on a revenue account? • What is the normal balance for an expense account? • What effect does a credit have on a withdrawals account? • What is the normal balance for a withdrawals account?

22. Temporary account Debit - Decrease Credit + Increase side Balance side Temporary account Permanent Account Capital Expenses Debit + Increase side Credit - Decrease side Revenue Withdrawals Debit - Decrease side Credit + Increase side Balance side Debit + Increase side Credit - Decrease side

23. 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.

24. 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.