Accounting 21th waren reeve fess chapter 03

Chapter 3
The Matching Concept
and the Adjusting Process
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this
electronic presentation is used with the permission of
NVTech Inc.


Some
Some of
of the
the action
action has
has been
been automated,
automated, so
so
click
click the
the mouse
mouse when
when you

you see
see this
this
lightning
lightningbolt
bolt in
in the
the lower
lower right-hand
right-hand
corner
corner of
of the
the screen.
screen. You
You can
can point
point and
and
click
click anywhere
anywhere on
on the
the screen.
screen.


Objectives
Objectives
1. Explain how the matching concept relates to the

accrual basis ofAfter
accounting.
studying
After
studying this
this
2. Explain why adjustments
are should
necessary and list the
chapter,
chapter, you
you
should
characteristics of adjusting entries.
be
able
to:
be
able
to:
3. Journalize entries for accounts requiring adjustment.
4. Summarize the adjustment process and prepare an
adjusted trial balance.
5. Use vertical analysis to compare financial statement
items with each other and with industry averages.


The Matching Concept

Reporting Revenue and Expenses
TWO METHODS
Cash Basis of Accounting
Accrual Basis of Accounting


Under the cash basis for the
accounting period concept, revenues
and expenses are reported in the
income statement in the period in
which cash is received or paid.


Under the accrual basis for the
accounting period concept, revenues
are reported in the income statement in
the period in which they are earned.


Accrual Basis of Accounting

Revenue
Revenue reported
reported when
when earned
earned

Expense
Expense reported
reported when

when
incurred
incurred

Properly
Properly matches
matches revenues
revenues
and
and expenses
expenses in
in determining
determining
net
net income
income

Requires
Requires adjusting
adjusting entries
entries at
at
end
end of
of period
period


The
The matching

matching concept
concept supports
supports
reporting
reporting revenues
revenues and
and related
related
expenses
expenses in
in the
the same
same period.
period.

Paid $10,000 for
an advertising
campaign
for a
$10,000
product
thataswill
recorded
an
be introduced
asset in
2005.
2003.
2004

Sold the
advertised
$10,000
product.
expensed in
2005 to match
revenues
2005


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

Unadjusted
Unadjusted
trial
trial
balance
balance

2
2
2
2
20
1

065
220
000
400
000
800

00
00
00
00
00
00
900 00
360 00
25 000 00

4 000 00
16 340 00
4 275 00
1 600 00
985 00
800 00
455 00
42 600 00 42 600 00


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2
2
2
2
20
1

065
220
000
400
000
800

00
00
00
00
00
00
900 00
360 00
25 000 00

Assets
Assets

4 000 00
16 340 00

4 275 00
1 600 00
985 00
800 00
455 00
42 600 00 42 600 00


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2
2

2
2
20
1

065
220
000
400
000
800

00
00
00
00
00
00
900 00
360 00
25 000 00

4 000 00

Liabilities
Liabilities

16 340 00
4 275 00
1 600 00

985 00
800 00
455 00
42 600 00 42 600 00


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2
2
2
2

20
1

065
220
000
400
000
800

00
00
00
00
00
00
900 00
360 00
25 000 00

4 000 00
16 340 00

Owner’s
Owner’s
Equity
Equity

4 275 00
1 600 00

985 00
800 00
455 00
42 600 00 42 600 00


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2
2
2
2

20
1

065
220
000
400
000
800

00
00
00
00
00
00
900 00
360 00
25 000 00

4 000 00
16 340 00

Revenue
Revenue

4 275 00
1 600 00
985 00
800 00

455 00
42 600 00 42 600 00


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2
2
2
2
20
1

Expenses
Expenses

065
220
000
400
000
800

00
00
00
00
00
00
900 00
360 00
25 000 00

4 000 00
16 340 00
4 275 00
1 600 00
985 00
800 00
455 00
42 600 00 42 600 00

NetSolutions
Chart of Accounts
Balance Sheet
1.
11
12
14
15
17
18
19
2.
21
22
23

Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated
Depreciation19
Accumulated Depreciation
Liabilities
Accounts Payable
Wages Payable

Unearned Rent

3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

Income Statement
4. Revenue
41 Fees Earned
42 Rent Revenue
5.
51
52
53
54
55
56
59

Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Miscellaneous Expense


Deferred

Expenses
(Prepaid
Expenses)


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2 065 00
2 220 00
2 000 00
2 400 00
Some

Some of
of these
these supplies
supplies
have
20 have
000 00
1 800
00
been
31,
been used.
used. On
On December
December
31,

aa count
count reveals
revealsthat
that $760
$760 of
of
supplies
supplies are
are on
on hand.
hand.

900 00

360 00
25 000 00

4 000 00
16 340 00

4 275 00
1 600 00
985 00
800 00
455 00
42 600 00 42 600 00


Supplies (balance on trial balance)
Supplies on hand, December 31
Supplies used
2005

1 Dec. 31 Supplies Expense
Supplies
2

55
14

$2,000
– 760
$1,240

1 240 00
1 240 00

3
4

Supplies Expense
Supplies
14
Bal. 2,000
Dec. 31 1,240 Bal.
800
Dec. 31 1,240
760
2,040

55


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent

Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2
2
2
2
20
1

065
220
000
400
000
800

00
00
00
00
00
00

The
The prepayment
prepayment for
for 24
24 months
months900
360
of
of insurance
insurance does
does not
not reflect
reflect that
that
25 000
December’s
December’s insurance
insurance
has
4 000 has
00
16 340
theoretically
theoretically expired.
expired.
4 275 00
1 600
985
800
455

42 600

00
00
00
00

00
00
00
00
00 42 600 00


4
5

31 Insurance Expense

56

Prepaid Insurance

100 00

15

100 00

6

7

Prepaid Insurance
Bal.
2,400
Dec. 31
2,300

15

100

Insurance Expense
Dec. 31
100

Note:
Note: You
You probably
probably have
have the
the idea
idea of
of
how
how posting
posting flows,
flows, so
so the
the rest

rest of
of
the
the slides
slides will
will omit
omit the
the arrows.
arrows.

56


Effect
Effect of
of Omitting
Omitting Adjustment
Adjustment


Deferred Revenue
(Unearned
Revenue)


NetSolutions
Trial Balance
December 31, 2005
Cash
Accounts Receivable

Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

2
2
2
2
20
1

065
220
000
400
000
800

00

00
00
00
00
00

Three
Three months’
months’ rent,
rent, $360,
$360, was
was
received
received on
on December
December 1.
1. As
As of
of
December
December 31,
31, only
only $120
$120 has
has 900
360
been
been earned.
earned.
25 000

00
00
00

4 000 00
16 340 00
4 275 00
1 600 00
985 00
800 00
455 00
42 600 00 42 600 00


7
8

31 Unearned Rent

23

Rent Revenue

120 00
120 00

42

9

10

Unearned Rent
Dec. 31
120 Bal.

23

360
240

Rent Revenue
Dec. 31

42

120