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Ch 03 The Matching Concept and the Adjusting Process

Ch 03 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. Learning Objectives. Reporting Revenue and Expense. TWO METHODS.

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Ch 03 The Matching Concept and the Adjusting Process

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  1. Ch 03 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 Learning Objectives

  2. Reporting Revenue and Expense TWO METHODS Cash Basis of Accounting Accrual Basis of Accounting

  3. Cash Basis of Accounting • Revenue reported when cash is received • Expense reported when cash is paid • Does not properly match revenues and expenses

  4. 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

  5. The Matching Concept Debits = Credits Liabilities Assets Owner’s Equity Expenses Revenues

  6. The Matching Concept Debits = Credits Liabilities Assets Owner’s Equity Net Income Expenses Revenues

  7. The Matching Concept Debits = Credits Liabilities Assets Owner’s Equity Net Income Expenses Revenues matching Net income is determined by properly matching expenses and revenues.

  8. 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 Assets

  9. 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 Liabilities

  10. 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 Owner’s Equity

  11. 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 Revenue

  12. 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 42,600 42,600 Expenses

  13. 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 42,600 42,600

  14. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1. Assets 11 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 59 Miscellaneous Expense

  15. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1. Assets 11 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 59 Miscellaneous Expense

  16. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1. Assets 11 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 59 Miscellaneous Expense

  17. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1. Assets 11 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 59 Miscellaneous Expense

  18. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1. Assets 11 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 59 Miscellaneous Expense

  19. Adjustments – Deferrals and Accruals Revenues Current Period Future Period Deferrals Cash Received Cash Received Revenue Recorded

  20. Adjustments – Deferrals and Accruals Revenues Current Period Future Period Deferrals Cash Received Cash Received Revenue Recorded Accruals Revenue Recorded Cash Received

  21. Adjustments – Deferrals and Accruals Revenues Current Period Future Period Deferrals Cash Received Cash Received Revenue Recorded Accruals Revenue Recorded Cash Received Expenses Current Period Future Period Deferrals Cash Paid Cash Paid Expense Recorded

  22. Adjustments – Deferrals and Accruals Revenues Current Period Future Period Deferrals Cash Received Cash Received Revenue Recorded Accruals Revenue Recorded Cash Received Expenses Current Period Future Period Deferrals Cash Paid Cash Paid Expense Recorded Expense Recorded Cash Paid Accruals

  23. Adjustments – Deferred Expense On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Example P1 – Purchase initially recorded as an asset. Adjustment A1 – Record insurance used for December, $100. Cash P1..... 2,400 Prepaid Insurance Assets P1..... 2,400 Insurance Expense Expenses

  24. A1 A1 Adjustments – Deferred Expense On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Example P1 – Purchase initially recorded as an asset. Adjustment A1 – Record insurance used for December, $100. Cash P1..... 2,400 Prepaid Insurance Assets P1..... 2,400 A1..... 100 Insurance Expense A1.....100 Expenses

  25. Adjustments – Deferred Expense On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Example P2 – Purchase initially recorded as an expense. Adjustment A2 – Record insurance unused as of December 31. Cash P2..... 2,400 Prepaid Insurance Assets Insurance Expense P2..... 2,400 Expenses

  26. A2 A2 Adjustments – Deferred Expense On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Example P2 – Purchase initially recorded as an expense. Adjustment A2 – Record insurance unused as of December 31. Cash P2..... 2,400 Prepaid Insurance Assets A2..... 2,300 Insurance Expense P2..... 2,400 A2.....2,300 Expenses

  27. Adjustments – Deferred Revenue On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Example S1 – Sale initially recorded as a liability. Adjustment A3 – Record rent earned for December. Cash S1..... 360 Unearned Rent Liabilities S1..... 360 Rent Revenue Revenues

  28. A3 A3 Adjustments – Deferred Revenue On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Example S1 – Sale initially recorded as a liability. Adjustment A3 – Record rent earned for December. Cash S1..... 360 Unearned Rent Liabilities A3..... 120 S1..... 360 Rent Revenue A3.....120 Revenues

  29. Adjustments – Deferred Revenue On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Example S2 – Sale initially recorded as revenue. Adjustment A4 – Record rent unearned as of December 31. Cash S2..... 360 Unearned Rent Liabilities Rent Revenue S2.....360 Revenues

  30. A4 A4 Adjustments – Deferred Revenue On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Example S2 – Sale initially recorded as revenue. Adjustment A4 – Record rent unearned as of December 31. Cash S2..... 360 Unearned Rent Liabilities A4..... 240 Rent Revenue A4..... 240 S2.....360 Revenues

  31. Adjustments – Accrued 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. Wages Payable Liabilities Wages Expense Bal.....4,275 Expenses

  32. A5 A5 Adjustments – Accrued 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. Wages Payable Liabilities A5..... 250 Wages Expense Bal.....4,275 Expenses A5.....250

  33. Adjustments – Accrued Revenue 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 Assets Bal.....2,220 Fees Earned Bal....16,340 Revenues

  34. A6 A6 Adjustments – Accrued Revenue 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 Assets Bal.....2,220 A6..... 500 Fees Earned Bal....16,340 Revenues A6.....500

  35. A1 A2 Summary of Adjustments Buying Side Deferred Expenses Assets Expenses Rearranging the Debits

  36. A1 A2 A3 A4 Summary of Adjustments Buying Side Selling Side Deferred Expenses Deferred Revenues Assets Liabilities Expenses Revenues Rearranging the Debits Rearranging the Credits

  37. A5 Summary of Adjustments Buying Side Selling Side Accrued Expenses Liabilities Expenses Adding a New Transaction

  38. A5 A6 Summary of Adjustments Buying Side Selling Side Accrued Expenses Accrued Revenues Liabilities Assets Expenses Revenues Adding a New Transaction Adding a New Transaction

  39. A1 A2 A5 A3 A4 A6 Summary of Adjustments Buying Side Selling Side Deferred Expenses Accrued Expenses Deferred Revenues Accrued Revenues Assets Liabilities Liabilities Assets Expenses Expenses Revenues Revenues Rearranging the Debits Adding a New Transaction Rearranging the Credits Adding a New Transaction

  40. Financial Analysis and Interpretation Comparative Income StatementsFor the Years Ended December 31, 2003 and 2002 Objective: Use vertical analysis to compare financial statement items with each other and with industry averages. Fees earned $ 187,500 100.0% $ 150,000 100.0% Operating expenses: Wages expense $ 60,000 32.0% $ 45,000 30.0% Rent expense 15,000 8.0 2003 2002 Amount Percent Amount Percent Vertical Analysis: Wages expense $ 60,000 Fees earned $ 187,500 = 32.0%

  41. HOME WORK READING: • Illustrative problem • Self- examination questions • Multiple choice Writing: • Exercise 3-1; 3-17; • Problem 3-5A; 3-6B Discussion: • Activity 3-4 Eminent television repair

  42. The end of Chapter 3.

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