03 the matching concept and the adjusting process
TRANSCRIPT
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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
C3
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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
369203641
Note: To select a topic, type the slide # and press Enter.
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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The Matching Concept
Assets
Liabilities
Owner’sEquity
Debits = Credits
Expenses Revenues
NetIncome
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The Matching Concept
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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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 1,80021 Accounts Payable 90023 Unearned Rent 360
Liabilities
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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 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,000
Owner’sEquity
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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 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,00041 Fees Earned 16,340Revenue
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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 1,80021 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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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 1,80021 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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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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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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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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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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Adjustments – Deferrals and Accruals
Current Period Future Period Cash Received Revenue Recorded Deferrals Cash Received
Accruals Revenue Recorded Cash Received
Revenues
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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
Deferrals
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Adjustments – Deferrals and Accruals
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
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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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.
A1..... 100
A1.....100 Expenses
Assets
A1
Example P1 – Purchase initially recorded as an asset.
A1
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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 ofDecember 31.
Expenses
Assets
Example P2 – Purchase initially recorded as an expense.
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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 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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Adjustments – Deferred Revenue
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.
A3
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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.
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Adjustments – Deferred 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.
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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Summary of Adjustments
DeferredExpenses
Expenses
Assets
A1 A2
DeferredRevenues
Revenues
Liabilities
A3 A4
Buying Side Selling Side
Rearrangingthe Debits
Rearrangingthe Credits
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Summary of Adjustments
Expenses
Liabilities
A5
AccruedExpenses
Buying Side Selling Side
Adding a NewTransaction
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Summary of Adjustments
Expenses
Liabilities
A5
Revenues
Assets
A6
AccruedExpenses
Buying Side Selling Side
Adding a NewTransaction
Adding a NewTransaction
AccruedRevenues
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Summary of Adjustments
DeferredExpenses
Expenses
Assets
A1 A2
Expenses
Liabilities
A5
DeferredRevenues
Revenues
Liabilities
A3 A4
Revenues
Assets
A6
AccruedExpenses
Buying Side Selling Side
Rearrangingthe Debits
Adding a NewTransaction
Rearrangingthe Credits
Adding a NewTransaction
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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Note: To see the topic slide, type 2 and press Enter.
Power Notes
Chapter 3 The Matching Concept and the Adjusting Process
This is the last slide in Chapter 3.