03 the matching concept and the adjusting process

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Learning Objectives

Power Notes The Matching Concept and the Adjusting Process

1. The Matching Concept2. Nature of the Adjusting Process3. Recording Adjusting Entries4. Summary of Adjustment Process5. Financial Analysis and Interpretation

Chapter 3

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• Reporting Revenue and Expense• The Matching Concept• Trial Balance, Chart of Accounts• Deferrals and Accruals• Summary of Adjustments• Vertical Analysis

Slide # Power Note Topics

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Chapter 3

The Matching Concept and the Adjusting Process Power Notes

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TWO METHODS

Reporting Revenue and Expense

Cash Basis of AccountingAccrual Basis of Accounting

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Cash Basis of Accounting

Revenue reported when cash is received Expense reported when cash is paid Does not properly match revenues and

expenses

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Accrual Basis of Accounting

Revenue reported when earned Expense reported when incurred Properly matches revenues and expenses

in determining net income Requires adjusting entries at end of period It just sounds mean – it really isn’t

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The Matching Concept

Assets

Liabilities

Owner’sEquity

Debits = Credits

Expenses Revenues

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Assets

Liabilities

Owner’sEquity

Debits = Credits

Expenses Revenues

NetIncome

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Assets

Liabilities

Owner’sEquity

Debits = Credits

Net income is determined by properly matching expenses and revenues.

Expenses Revenues

NetIncome

matching

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NetSolutionsUnadjusted Trial Balance

December 31, 200211 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,800

Assets

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December 31, 200211 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 360

Liabilities

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December 31, 200211 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,000

Owner’sEquity

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December 31, 200211 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,00041 Fees Earned 16,340Revenue

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December 31, 200211 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,00041 Fees Earned 16,34051 Wages Expense 4,27552 Rent Expense 1,60054 Utilities Expense 98555 Supplies Expense 80059 Miscellaneous Expense 455

42,600 42,600

Expenses

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December 31, 200211 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,00041 Fees Earned 16,34051 Wages Expense 4,27552 Rent Expense 1,60054 Utilities Expense 98555 Supplies Expense 80059 Miscellaneous Expense 455

42,600 42,600

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NetSolutionsExpanded Chart of Accounts

Balance Sheet Income Statement1. Assets11 Cash12 Accounts Receivable14 Supplies15 Prepaid Insurance17 Land18 Office Equipment19 Accumulated Depreciation

2. Liabilities21 Accounts Payable22 Wages Payable23 Unearned Rent

3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing

4. Revenue41 Fees Earned42 Rent Revenue

5. Expenses51 Wages Expense52 Rent Expense53 Depreciation Expense54 Utilities Expense55 Supplies Expense56 Insurance Expense59 Miscellaneous Expense

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Adjustments – Deferrals and Accruals

Current Period Future Period Cash Received Revenue Recorded Deferrals Cash Received

Revenues

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Accruals Revenue Recorded Cash Received

Revenues

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Current Period Future Period

Cash Paid Expense Recorded

Expenses

Cash Paid


Revenues

Deferrals

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Current Period Future Period

Expense Recorded Cash Paid

Cash Paid Expense Recorded

Expenses

Cash Paid


Revenues

Deferrals

Accruals

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Adjustments – Deferred Expense

P1..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P1..... 2,400

On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400.

Adjustment A1 – Record insurance used for December, $100.

Expenses

Assets

Example P1 – Purchase initially recorded as an asset.

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P1..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P1..... 2,400


Adjustment A1 – Record insurance used for December, $100.

A1..... 100

A1.....100 Expenses

Assets

A1

Example P1 – Purchase initially recorded as an asset.

A1

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P2..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P2..... 2,400


Adjustment A2 – Record insurance unused as ofDecember 31.

Expenses

Assets

Example P2 – Purchase initially recorded as an expense.

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P2..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P2..... 2,400


Adjustment A2 – Record insurance unused as ofDecember 31.

A2..... 2,300

A2.....2,300 Expenses

Assets

A2

Example P2 – Purchase initially recorded as an expense.

A2

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Adjustments – Deferred Revenue

Cash

Unearned Rent

Rent Revenue

S1..... 360

On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1.

Adjustment A3 – Record rent earned for December.

S1..... 360

Revenues

Liabilities

Example S1 – Sale initially recorded as a liability.

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A3..... 120

Cash

Unearned Rent

Rent Revenue

S1..... 360


Adjustment A3 – Record rent earned for December.

S1..... 360

A3.....120 Revenues

Liabilities

A3

Example S1 – Sale initially recorded as a liability.

A3

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Cash

Unearned Rent

Rent Revenue

S2..... 360


Adjustment A4 – Record rent unearned as of December 31.

S2.....360 Revenues

Liabilities

Example S2 – Sale initially recorded as revenue.

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A4..... 240

Cash

Unearned Rent

Rent Revenue

S2..... 360


Adjustment A4 – Record rent unearned as of December 31.

A4..... 240

S2.....360 Revenues

Liabilities

A4

Example S2 – Sale initially recorded as revenue.

A4

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Adjustments – Accrued Expense

Wages Payable

Wages Expense

NetSolutions received employee services for the last two days of December amounting to $250, to be paid later.

Adjustment A5 – Record accrued wages of $250.

Bal.....4,275 Expenses

Liabilities

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Adjustments – Accrued Expense

Wages Payable

Wages Expense

NetSolutions received employee services for the last two days of December amounting to $250, to be paid later.

Adjustment A5 – Record accrued wages of $250.

A5..... 250

Bal.....4,275 Expenses

Liabilities

A5A5

A5.....250

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Adjustments – Accrued Revenue

Accounts Receivable

Fees Earned

As of December 31, NetSolutions provided 25 hours of services at $20 per hour to be billed next month.

Adjustment A6 – Record accrued fees earned of $500.

Bal....16,340 Revenues

AssetsBal.....2,220

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Adjustments – Accrued Revenue

Accounts Receivable

Fees Earned

As of December 31, NetSolutions provided 25 hours of services at $20 per hour to be billed next month.

Adjustment A6 – Record accrued fees earned of $500.

A6..... 500

Bal....16,340 Revenues

Assets

A6

A6

A6.....500

Bal.....2,220

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Summary of Adjustments

DeferredExpenses

Expenses

Assets

A1 A2

Buying Side

Rearrangingthe Debits

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DeferredExpenses

Expenses

Assets

A1 A2

DeferredRevenues

Revenues

Liabilities

A3 A4

Buying Side Selling Side


Rearrangingthe Credits

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Expenses

Liabilities

A5

AccruedExpenses


Adding a NewTransaction

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Expenses

Liabilities

A5

Revenues

Assets

A6

AccruedExpenses




AccruedRevenues

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DeferredExpenses

Expenses

Assets

A1 A2

Expenses

Liabilities

A5

DeferredRevenues

Revenues

Liabilities

A3 A4

Revenues

Assets

A6

AccruedExpenses




Rearrangingthe Credits


AccruedRevenues

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Financial Analysis and Interpretation

Objective: Use vertical analysis to compare financial statement items with each other and with industry averages.

Comparative Income StatementsFor the Years Ended December 31, 2003 and 2002

Fees earned $ 187,500 100.0% $ 150,000 100.0%Operating expenses:

Wages expense $ 60,000 32.0% $ 45,00030.0%

Rent expense 15,000 8.0

2003 2002 Amount Percent Amount Percent

Vertical Analysis:

Wages expense $ 60,000Fees earned $ 187,500

= 32.0%

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Power Notes

Chapter 3 The Matching Concept and the Adjusting Process

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03 the matching concept and the adjusting process

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