Ch03 the matching concept and the adjusting process, intro accounting, 21st edition warren reeve...

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Chapter Chapter 3 3 The Matching Concept The Matching Concept and the Adjusting and the Adjusting Process Process Accounting, 21 st 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.

Transcript of Ch03 the matching concept and the adjusting process, intro accounting, 21st edition warren reeve...

Page 1: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Chapter Chapter 33The Matching Concept The Matching Concept

and the Adjusting Processand the Adjusting ProcessAccounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine 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.

Page 2: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand

corner of the screen. You can point and click anywhere on the screen.

Page 3: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

1. Explain how the matching concept relates to the accrual basis of accounting.

2. Explain why adjustments are necessary and list the characteristics of adjusting entries.

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.

ObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

Page 4: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

The Matching Concept

Page 5: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

TWO METHODS

ReportingReporting Revenue and Expenses Revenue and Expenses

Cash Basis of AccountingAccrual Basis of Accounting

Page 6: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

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.

Page 7: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Under the accrual basis for the accounting period concept, revenues

are reported in the income statement in the period in which they are earned.

Page 8: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Accrual Basis of AccountingAccrual Basis of Accounting

Revenue reported when earnedExpense reported when

incurredProperly matches revenues

and expenses in determining net income

Requires adjusting entries at end of period

Page 9: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

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

2004 2005

Paid $10,000 for an advertising campaign for a

product that will be introduced in

2003.

Sold the advertised product.$10,000 $10,000

expensed in expensed in 2005 to match 2005 to match

revenuesrevenues

Paid $10,000 for an advertising campaign for a

product that will be introduced in

2005.

$10,000 $10,000 recorded as an recorded as an

assetasset

Page 10: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsTrial Balance

December 31, 2005Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

Unadjusted trial

balance

Page 11: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2005

Assets

Page 12: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2005

Liabilities

Page 13: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2005

Owner’s Equity

Page 14: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2005

Revenue

Page 15: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2005

Expenses

Page 16: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsChart of Accounts

Balance Sheet Income Statement1. Assets11 Cash12 Accounts Receivable14 Supplies15 Prepaid Insurance17 Land18 Office Equipment19 Accumulated

Depreciation19Accumulated 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

Page 17: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Deferred Deferred Expenses Expenses (Prepaid (Prepaid

Expenses)Expenses)

Page 18: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsTrial Balance

December 31, 2005Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

Some of these supplies have been used. On December 31, a count reveals that $760 of

supplies are on hand.

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1

2

3

4

Supplies Expense 1 240 00Supplies 1 240 00

Supplies (balance on trial balance) $2,000Supplies on hand, December 31 – 760Supplies used $1,240

Dec. 312005

Dec. 31 1,240Dec. 31 1,240

5514

SuppliesBal. 2,000

Supplies ExpenseBal. 800

14 55

2,040760

Page 20: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutionsTrial Balance

December 31, 2005

The prepayment for 24 months of insurance does not reflect that

December’s insurance has theoretically expired.

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4

5

6

7

31 Insurance Expense 100 00

Prepaid Insurance 100 00

Dec. 31 100 Dec. 31 100

56

15

Prepaid InsuranceBal. 2,400

Insurance Expense15 56

2,300

Note: You probably have the idea of how posting flows, so the rest of the slides will omit the arrows.

Page 22: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Effect of Omitting AdjustmentEffect of Omitting Adjustment

Page 23: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Deferred Revenue Deferred Revenue (Unearned (Unearned Revenue)Revenue)

Page 24: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsTrial Balance

December 31, 2005Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

Three months’ rent, $360, was received on December 1. As of

December 31, only $120 has been earned.

Page 25: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

7

8

9

10

31 Unearned Rent 120 00

Rent Revenue 120 00

Dec. 31 120 Dec. 31 120

23

42

Unearned RentBal. 360

Rent Revenue23 42

240

Page 26: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Effect of Omitting AdjustmentEffect of Omitting Adjustment

Page 27: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Accrued Accrued Expenses Expenses (Accrued (Accrued

Liabilities)Liabilities)

Page 28: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsTrial Balance

December 31, 2005Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

25

At the end of December, accrued wages amounted to $250.

Currently, Wages Expense is understated and there is no

liability shown for these wages.

Page 29: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

10

11

12

13

31 Wages Expense 250 00

Wages Payable 250 00

Dec. 31 250Dec. 31 250

51

22

Wages PayableBal. 4,275

Wages Expense22 51

Page 30: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Effect of Omitting AdjustmentEffect of Omitting Adjustment

Page 31: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Accrued Accrued Revenues Revenues (Accrued (Accrued Expenses)Expenses)

Page 32: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsTrial Balance

December 31, 2005Cash 2 065 00Accounts Receivable 2 220 00Supplies 2 000 00Prepaid Insurance 2 400 00Land 20 000 00Office Equipment 1 800 00Accounts Payable 900 00Unearned Rent 360 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 340 00Wages Expense 4 275 00Rent Expense 1 600 00Utilities Expense 985 00Supplies Expense 800 00Miscellaneous Expense 455 00

42 600 00 42 600 00

NetSolutions provided $500 in services during December for which the customer has

not been billed.

29

Page 33: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

13

14

15

16

31 Accounts Receivable 500 00Fees Earned 500 00

Dec. 31 500Dec. 31 500

1241

Accounts ReceivableBal. 16,340

Fees Earned12 41Bal. 2,220

2,720 16,840

Page 34: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Effect of Omitting AdjustmentEffect of Omitting Adjustment

Page 35: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Fixed Fixed AssetsAssets

Page 36: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

LandLand

Land has an infinite life; therefore, it does not depreciate.

Page 37: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

BuildingBuilding

A building has a limited life, so it must be depreciated. The contra account used in the adjusting entry is

Accumulated Depreciation—Building

Page 38: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

EquipmentEquipment

Because equipment has a limited life, it depreciates. The contra account used is Accumulated Depreciation—Equipment

Page 39: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutions estimates the NetSolutions estimates the depreciation on its office equipment depreciation on its office equipment

to be $50 for the month of December.to be $50 for the month of December.

16

17

18

19

Accumulated Depreciation—

Office Equipment 50 00

Dec. 31 50

19

Depreciation ExpenseDec. 31 50

Accumulated Depreciation—Office Equipment

19 53

53Depreciation Expense 50 0031

Page 40: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutions’ balance sheet would show the office

equipment at cost, less the accumulated depreciation.

Office equipment $1,800 Less accumulated depreciation 50 $1,750

Book Book valuevalue

Page 41: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Effect of Omitting AdjustmentEffect of Omitting Adjustment

Page 42: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Summary of Basic AdjustmentsSummary of Basic Adjustments

Page 43: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutions’ Adjusted Trial Balance for

December 31, 2005

Page 44: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsAdjusted Trial Balance

December 31, 2005Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 25 000 00Chris Clark, Drawing 4 000 00Fees Earned 16 840 00Rent Revenue 120 00Wages Expense 4 525 00Rent Expense 1 600 00Utilities Expense 985 00

41

Continued

Page 45: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

NetSolutionsTrial Balance

December 31, 2005Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Utilities Expense 985 00Supplies Expense 2 040 00Insurance Expense 100 00Miscellaneous Expense 455 00

43 400 00 43 400 00

42

Page 46: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Vertical Vertical Analysis and Analysis and InterpretationInterpretation

Page 47: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Fees earned $187,500 $150,000

Operating expenses:Wages expense $60,000 $45,000Rent expense 15,000 12,000Utilities expense 12,500 9,000Supplies expense 2,700 3,000Miscellaneous exp. 2,300 1,800 Total operating expenses $92,500 $70,800

Net income $95,000 $79,200

Amount Percent Amount Percent

2006 2005

J. Holmes, Attorney-at-LawIncome Statements

For the Years Ended December 31, 2005 and 2006

Page 48: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Fees earned $187,500 100.0% $150,000100.0%

Operating expenses:Wages expense $60,000 $45,000Rent expense 15,000 12,000Utilities expense 12,500 9,000Supplies expense 2,700 3,000Miscellaneous exp. 2,300 1,800 Total operating expenses $92,500 $70,800

Net income $95,000 $79,200

Amount Percent Amount Percent

2006 2005

Page 49: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Fees earned $187,500 100.0% $150,000100.0%

Operating expenses:Wages expense $60,000 $45,000Rent expense 15,000 12,000Utilities expense 12,500 9,000Supplies expense 2,700 3,000Miscellaneous exp. 2,300 1,800 Total operating expenses $92,500 $70,800

Net income $95,000 $79,200

2006 2005 Amount Percent Amount Percent

$60,000$60,000$187,500$187,50032.0%$15,000$15,000

$187,500$187,50038.0%

Page 50: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

Fees earned $187,500 100.0% $150,000100.0%

Operating expenses:Wages expense $60,000 $45,000

30.0%Rent expense 15,000 12,000

8.0%Utilities expense 12,500 9,000

6.0%Supplies expense 2,700 3,000

2.0%Miscellaneous exp. 2,300 1,800

1.2% Total operating expenses $92,500 $70,800

47.2%Net income $95,000 $79,200

52.8%

6.7%1.4%

1.2%

49.3%50.7%

2006 2005 Amount Percent Amount Percent

32.0%38.0%

Page 51: Ch03   the matching concept and the adjusting process, intro accounting, 21st edition warren reeve fess eng

The End

Chapter 3Chapter 3