Learning Objectives
Power
Notes
The Matching Concept and the Adjusting Process
The Matching Concept and the Adjusting Process
1. The Matching Concept
2. Nature of the Adjusting Process
3. Recording Adjusting Entries
4. Summary of Adjustment Process
5. Financial Analysis and Interpretation
Chapter 3
•
Reporting Revenue and Expense
•
The Matching Concept
•
Trial Balance, Chart of Accounts
•
Deferrals and Accruals
•
Summary of Adjustments
•
Vertical Analysis
Slide # Power Note Topics
3
6
9
20
36
41
Chapter 3
The Matching Concept and the Adjusting Process
The Matching Concept and the Adjusting Process
TWO METHODS
Cash Basis of Accounting
Cash Basis of Accounting
Revenue reported when cash is received Expense reported when cash is paid
Does not properly match revenues and
Revenue reported when earned
Expense reported when incurred
Properly matches revenues and expenses
in determining net income
The Matching Concept
The Matching Concept
The Matching Concept
The Matching Concept
Assets
Liabilities
Owner’s
Equity
Debits = Credits
Assets
Liabilities
Owner’s
Equity
Debits = Credits
Expenses
Revenues
The Matching Concept
The Matching Concept
The Matching Concept
The Matching Concept
Assets
Liabilities
Owner’s
Equity
Debits = Credits
Net income is determined by properly
matching expenses and revenues.
Expenses
Revenues
Net Income
Unadjusted Trial Balance December 31, 2002 11
11 CashCash 2,0652,065 12
12 Accounts ReceivableAccounts Receivable 2,2202,220 14
14 SuppliesSupplies 2,0002,000 15
15 Prepaid InsurancePrepaid Insurance 2,4002,400 17
17 LandLand 20,00020,000 18
18 Office EquipmentOffice Equipment 1,8001,800 Assets
NetSolutions
Unadjusted Trial Balance December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800 21
21 Accounts PayableAccounts Payable 900900 23
23 Unearned RentUnearned Rent 360360 Liabilities
Unadjusted Trial Balance December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31
31 Chris Clark, CapitalChris Clark, Capital 25,00025,000 32
32 Chris Clark, DrawingChris Clark, Drawing 4,0004,000 Owner’s
Owner’s
Equity
NetSolutions
Unadjusted Trial Balance December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 4,000
41
41 Fees EarnedFees Earned 16,34016,340 Revenue
Unadjusted Trial Balance December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 4,000
41 Fees Earned 16,340
51
51 Wages ExpenseWages Expense 4,2754,275 52
52 Rent ExpenseRent Expense 1,6001,600 54
54 Utilities ExpenseUtilities Expense 985985 55
55 Supplies ExpenseSupplies Expense 800800 59
59 Miscellaneous ExpenseMiscellaneous Expense 455455
42,600 42,600 Expenses
NetSolutions
Unadjusted Trial Balance December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 4,000
41 Fees Earned 16,340
51 Wages Expense 4,275
52 Rent Expense 1,600
54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
Expanded Chart of Accounts
Balance Sheet
Income Statement
1. Assets11 Cash
12 Accounts Receivable 14 Supplies
15 Prepaid Insurance 17 Land
18 Office Equipment
19 Accumulated Depreciation 2. Liabilities
21 Accounts Payable 22 Wages Payable 23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital 32 Chris Clark, Drawing
4. Revenue
41 Fees Earned 42 Rent Revenue
5. Expenses
51 Wages Expense 52 Rent Expense
53 Depreciation Expense 54 Utilities Expense
55 Supplies Expense 56 Insurance Expense
NetSolutions
Expanded Chart of Accounts
Balance Sheet
Income Statement
1. Assets11 Cash
12 Accounts Receivable 14 Supplies
15 Prepaid Insurance 17 Land
18 Office Equipment
19 Accumulated Depreciation 2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital 32 Chris Clark, Drawing
4. Revenue
41 Fees Earned 42 Rent Revenue
5. Expenses
51 Wages Expense 52 Rent Expense
53 Depreciation Expense 54 Utilities Expense
55 Supplies Expense 56 Insurance Expense
Expanded Chart of Accounts
Balance Sheet
Income Statement
1. Assets11 Cash
12 Accounts Receivable 14 Supplies
15 Prepaid Insurance 17 Land
18 Office Equipment
19 Accumulated Depreciation 2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital 32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue 5. Expenses
51 Wages Expense 52 Rent Expense
53 Depreciation Expense 54 Utilities Expense
55 Supplies Expense 56 Insurance Expense
NetSolutions
Expanded Chart of Accounts
Balance Sheet
Income Statement
1. Assets11 Cash
12 Accounts Receivable 14 Supplies
15 Prepaid Insurance 17 Land
18 Office Equipment
19 Accumulated Depreciation 2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital 32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue 5. Expenses
51 Wages Expense 52 Rent Expense
53 Depreciation Expense
54 Utilities Expense 55 Supplies Expense 56 Insurance Expense
Expanded Chart of Accounts
Balance Sheet
Income Statement
1. Assets11 Cash
12 Accounts Receivable 14 Supplies
15 Prepaid Insurance 17 Land
18 Office Equipment
19 Accumulated Depreciation 2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital 32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue 5. Expenses
51 Wages Expense 52 Rent Expense
53 Depreciation Expense
54 Utilities Expense 55 Supplies Expense
56 Insurance Expense
Adjustments – Deferrals and Accruals
Adjustments – Deferrals and Accruals
Adjustments – Deferrals and Accruals
Adjustments – Deferrals and Accruals
Current Period
Future Period
Cash Received
Revenue Recorded
Deferrals
Cash Received
Current Period
Future Period
Cash Received
Revenue Recorded
Deferrals
Cash Received
Accruals
Revenue Recorded
Cash Received
Adjustments – Deferrals and Accruals
Adjustments – Deferrals and Accruals
Adjustments – Deferrals and Accruals
Adjustments – Deferrals and Accruals
Current Period
Future Period
Cash Received
Revenue Recorded
Deferrals
Cash Received
Current Period
Future Period
Cash Paid
Expense Recorded
Expenses
Cash Paid
Accruals
Revenue Recorded
Cash Received
Revenues
Current Period
Future Period
Cash Received
Revenue Recorded
Deferrals
Cash Received
Current Period
Future Period
Expense Recorded
Cash Paid
Cash Paid
Expense Recorded
Expenses
Cash Paid
Accruals
Revenue Recorded
Cash Received
Revenues
Deferrals
Adjustments – Deferred Expense
Adjustments – Deferred Expense
Adjustments – Deferred Expense
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.
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.
A1... 100
A1...100 Expenses
Assets
A1
Example P1 – Purchase initially recorded as an asset.
Example P1 – Purchase initially recorded as an asset.
Adjustments – Deferred Expense
Adjustments – Deferred Expense
P2... 2,400
Cash
Prepaid Insurance
Insurance Expense
P2... 2,400
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Adjustment A2 – Record
insurance unused as of
December 31.
Expenses Assets
Example P2 – Purchase initially recorded as an expense.
P2... 2,400
Cash
Prepaid Insurance
Insurance Expense
P2... 2,400
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Adjustment A2 – Record
insurance unused as of
December 31.
A2... 2,300
A2...2,300 Expenses Assets
A2
Example P2 – Purchase initially recorded as an expense.
Example P2 – Purchase initially recorded as an expense.
Adjustments – Deferred Revenue
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.
A3... 120
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
A3...120 Revenues
Liabilities
A3
Example S1 – Sale initially recorded as a liability.
Example S1 – Sale initially recorded as a liability.
Adjustments – Deferred Revenue
Adjustments – Deferred Revenue
Cash
Unearned Rent
Rent Revenue
S2... 360
On December 1, NetSolutions received cash of $360 for
three months’ rent beginning December 1.
Adjustment A4 – Record rent
unearned as of December 31.
S2...360 Revenues
Liabilities
Example S2 – Sale initially recorded as revenue.
A4... 240
Cash
Unearned Rent
Rent Revenue
S2... 360
On December 1, NetSolutions received cash of $360 for
three months’ rent beginning December 1.
Adjustment A4 – Record rent
unearned as of December 31.
A4... 240
S2...360 Revenues
Liabilities
A4
Example S2 – Sale initially recorded as revenue.
Example S2 – Sale initially recorded as revenue.
Adjustments – Accrued Expense
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
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
A5 A5
Adjustments – Accrued Revenue
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.
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
Summary of Adjustments
Summary of Adjustments
Deferred
Expenses
Expenses Assets
A1 A2
Buying Side
Buying Side
Deferred
Expenses
Expenses Assets
A1 A2
Deferred
Revenues
Revenues Liabilities
A3 A4
Buying Side
Buying Side
Selling Side
Selling Side
Rearranging the Debits
Summary of Adjustments
Summary of Adjustments
Expenses Liabilities
A5
Accrued
Expenses
Buying Side
Buying Side
Selling Side
Selling Side
Expenses Liabilities
A5
Revenues Assets
A6
Accrued
Expenses
Buying Side
Buying Side
Selling Side
Selling Side
Adding a New Transaction
Adding a New Transaction
Summary of Adjustments
Summary of Adjustments
Deferred
Expenses
Expenses Assets A1 A2 Expenses Liabilities A5Deferred
Revenues
Revenues Liabilities A3 A4 Revenues Assets A6Accrued
Expenses
Buying Side
Buying Side
Selling Side
Selling Side
Rearranging the Debits
Adding a New Transaction
Rearranging the Credits
Adding a New Transaction
Objective:
Use vertical analysis to compare financial
statement items with each other and with industry averages.
Comparative Income Statements
For the Years Ended December 31, 2003 and 2002
Fees earned $ 187,500100.0% $ 150,000100.0% Operating expenses:
Wages expense $ 60,00032.0% $ 45,00030.0% Rent expense 15,0008.0
2003 2002
Amount
Percent
Amount Percent
Vertical Analysis:
Vertical Analysis:
Wages expense
$ 60,000
Note:
To see the topic slide, type 2 and press Enter.
Power Notes
Chapter 3
The Matching Concept and the Adjusting Process
The Matching Concept and the Adjusting Process
