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The Matching Concept

The Matching Concept. …and the Adjustment Process. The Accounting Period Concept. The Cash Basis may be used by small service businesses, who have few payables and receivables. The Cash Basis of Accounting.

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The Matching Concept

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  1. The Matching Concept …and the Adjustment Process

  2. The Accounting Period Concept The Cash Basis may be used by small service businesses, who have few payables and receivables. The Cash Basis of Accounting The Accrual Basis is normally required by Generally Accepted Accounting Principles (GAAP) This is known as theMatching Principle The Accrual Basis of Accounting

  3. The Accrual Basis Four basic items require adjusted entries……

  4. Deferrals and Accruals

  5. Income Statement Journal – Adjusting Entry after posting …. Balance Sheet Assets Liabilities Deferred (Prepaid) Expenses Initially recorded as assets, but become expenses over time, or as consumed. Example: Prepaid Insurance $600 for 3 months. At closing, 1month ($200) used up. Example: Prepaid Insurance is now only $400, not $600 as before. Owners’ Equity

  6. Adjustment Summary – Deferred Expense Adjusting Entry Debit Expense Credit Asset If you don’t do this….. On the Income Statement Expenses too low and Net Income too high! On the Balance Sheet Assets too high and Owners’ Equity too high!

  7. Income Statement Journal – Adjusting Entry after posting …. Balance Sheet Assets Liabilities Deferred (Unearned) Revenues Initially recorded as Liabilities, but become revenues over time, or through normal business. Example: Weekly magazine receives $104 for one year subscription ($2/week). At closing , 20 weeks already sent. Example: Unearned Subscriptions is now only $64, not $104 as before. Owners’ Equity

  8. Adjustment Summary – Deferred Revenues Adjusting Entry Debit Liability Credit Revenue If you don’t do this….. On the Income Statement Revenues too low and Net Income too low! On the Balance Sheet Liabilities too high and Owners’ Equity too low!

  9. Income Statement Journal – Adjusting Entry Example: A painter is 60% finished on a job that will pay him $2,000 when finished. Accrued Assets (Revenues) Revenues earned but not yet recorded. after posting …. Balance Sheet Assets Liabilities Owners’ Equity

  10. Adjustment Summary – Accrued Revenues Adjusting Entry Debit Asset Credit Revenue If you don’t do this….. On the Income Statement Revenues too low and Net Income too low! On the Balance Sheet Assets too low and Owners’ Equity too low!

  11. Income Statement Journal – Adjusting Entry Example: A secretary gets her monthly salary of $1,800 at the end of the month. Accounts are closed on the 15th. Accrued Liabilities (Expenses) Expenses incurred but not yet recorded. after posting …. Balance Sheet Assets Liabilities Owners’ Equity

  12. Adjustment Summary – Accrued Expense Adjusting Entry Debit Expense Credit Liability If you don’t do this….. On the Income Statement Expenses too low and Net Income too high! On the Balance Sheet Liabilities too low and Owners’ Equity too high!

  13. Depreciation

  14. Income Statement Journal – Adjusting Entry after posting …. Balance Sheet Assets Liabilities Office Equipment - Net Initially recorded as assets, but become expensed (depreciated) over time. Example: A computer is bought for $1,000. It will be depreciated over 5 years to $0 value (or $200 per year. After one year….. Example: The Net Value of the computer is now $800. After next year it will have a book value only $600. Owners’ Equity

  15. Adjustment Summary – Fixed Asset Depreciation Adjusting Entry Debit Expense Credit Contra-Asset If you don’t do this….. On the Income Statement Expenses too low and Net Income too high! On the Balance Sheet Assets too high and Owners’ Equity too high!

  16. Summary of Adjusting Entries • Deferred (Prepaid) Expenses • Adjustment: Debit (add) Expense and Credit (subtract) Asset Example: Prepaid Insurance and Insurance Expense • Deferred (Unearned) Revenues • Adjustment: Debit (subtract) Liability and Credit (add) Revenue Example: Equipment Depreciation Expense and Accumulated Depreciation Example: Prepaid Subscriptions and Subscription Sales • Accrued Assets (Revenues) • Adjustment: Debit (add) Acct. Receivable and Credit (add) Revenue Example: Painted Fees and Acct.s Payable • Accrued Liabilities (Expenses) • Adjustment: Debit (add) Expense and Credit (add) Acct. Payable Example: Wages Expense and Wages Payable • Depreciation of Fixed Asset • Adjustment: Debit (add) Depreciation Expense and Credit (add) Accumulated Depreciation, which will Credit (subtract) Net Asset Value

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