Chapter F3
Power Notes
The Matching Concept and the Adjusting Process
Learning Objectives
1. The Matching Concept
2. Nature of the Adjusting Process
3. Recording Adjusting Entries
4. Summary of Adjustment Process
5. Financial Analysis and Interpretation
C3
C3 - 1
Chapter F3
Power Notes
The Matching Concept and the Adjusting Process
Slide # Power Note Topics
3
6
9
20
36
41
•
•
•
•
•
•
Reporting Revenue and Expense
The Matching Concept
Trial Balance, Chart of Accounts
Deferrals and Accruals
Summary of Adjustments
Vertical Analysis
Note: To select a topic, type the slide # and press Enter.
C3 - 2
Reporting Revenue and Expense
TWO METHODS
Cash Basis of Accounting
Accrual Basis of Accounting
C3 - 3
Cash Basis of Accounting

Revenue reported when cash is received

Expense reported when cash is paid

Does not properly match revenues and
expenses
C3 - 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

It just sounds mean – it really isn’t
C3 - 5
The Matching Concept
Debits = Credits
Liabilities
Assets
Owner’s
Equity
Expenses
Revenues
C3 - 6
The Matching Concept
Debits = Credits
Liabilities
Assets
Owner’s
Equity
Net
Income
Expenses
Revenues
C3 - 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.
C3 - 8
NetSolutions
Unadjusted Trial Balance
December 31, 2002
Assets
11
12
14
15
17
18
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
2,065
2,220
2,000
2,400
20,000
1,800
C3 - 9
NetSolutions
Unadjusted Trial Balance
December 31, 2002
Liabilities
11
12
14
15
17
18
21
23
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
2,065
2,220
2,000
2,400
20,000
1,800
900
360
C3 - 10
NetSolutions
Unadjusted Trial Balance
December 31, 2002
Stockholders’
Equity
11
12
14
15
17
18
21
23
31
33
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Capital Stock
Dividends
2,065
2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
C3 - 11
NetSolutions
Unadjusted Trial Balance
December 31, 2002
Revenue
11
12
14
15
17
18
21
23
31
33
41
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Capital Stock
Dividends
Fees Earned
2,065
2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
16,340
C3 - 12
NetSolutions
Unadjusted Trial Balance
December 31, 2002
Expenses
11
12
14
15
17
18
21
23
31
32
41
51
52
54
55
59
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Pat King, Capital
Pat King, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
2,065
2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
16,340
4,275
1,600
985
800
455
42,600
42,600
C3 - 13
NetSolutions
Unadjusted Trial Balance
December 31, 2002
11
12
14
15
17
18
21
23
31
33
41
51
52
54
55
59
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Capital Stock
Dividends
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
2,065
2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
16,340
4,275
1,600
985
800
455
42,600
42,600
C3 - 14
NetSolutions
Expanded Chart of Accounts
Balance Sheet
1.
11
12
14
15
17
18
19
Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation
2.
21
22
23
Liabilities
Accounts Payable
Wages Payable
Unearned Rent
3.
31
32
33
Stockholders’ Equity
Capital Stock
Retained Earnings
Dividends
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
C3 - 15
NetSolutions
Expanded Chart of Accounts
Balance Sheet
1.
11
12
14
15
17
18
19
Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation
2.
21
22
23
Liabilities
Accounts Payable
Wages Payable
Unearned Rent
3.
31
32
33
Stockholders’ Equity
Capital Stock
Retained Earnings
Dividends
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
C3 - 16
NetSolutions
Expanded Chart of Accounts
Balance Sheet
1.
11
12
14
15
17
18
19
Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation
2.
21
22
23
Liabilities
Accounts Payable
Wages Payable
Unearned Rent
3.
31
32
33
Stockholders’ Equity
Capital Stock
Retained Earnings
Dividends
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
C3 - 17
NetSolutions
Expanded Chart of Accounts
Balance Sheet
1.
11
12
14
15
17
18
19
Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation
2.
21
22
23
Liabilities
Accounts Payable
Wages Payable
Unearned Rent
3.
31
32
33
Stockholders’ Equity
Capital Stock
Retained Earnings
Dividends
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
C3 - 18
NetSolutions
Expanded Chart of Accounts
Balance Sheet
1.
11
12
14
15
17
18
19
Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation
2.
21
22
23
Liabilities
Accounts Payable
Wages Payable
Unearned Rent
3.
31
32
33
Stockholders’ Equity
Capital Stock
Retained Earnings
Dividends
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
C3 - 19
Adjustments – Deferrals and Accruals
Revenues
Current Period
Deferrals
Cash Received
Future Period
Revenue Recorded
C3 - 20
Adjustments – Deferrals and Accruals
Revenues
Current Period
Deferrals
Cash Received
Accruals
Revenue Recorded
Future Period
Revenue Recorded
Cash Received
C3 - 21
Adjustments – Deferrals and Accruals
Revenues
Current Period
Deferrals
Cash Received
Accruals
Revenue Recorded
Cash Received
Current Period
Future Period
Expenses
Deferrals
Cash Paid
Future Period
Revenue Recorded
Expense Recorded
C3 - 22
Adjustments – Deferrals and Accruals
Revenues
Current Period
Deferrals
Cash Received
Accruals
Revenue Recorded
Cash Received
Current Period
Future Period
Expenses
Deferrals
Accruals
Cash Paid
Expense Recorded
Future Period
Revenue Recorded
Expense Recorded
Cash Paid
C3 - 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.
Cash
P1..... 2,400
Prepaid Insurance
Adjustment A1 – Record
insurance used for December,
$100.
Assets
P1..... 2,400
Insurance Expense
Expenses
C3 - 24
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
P1..... 2,400
Assets
A1..... 100
A1
Insurance Expense
A1.....100
A1
Expenses
C3 - 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.
Cash
P2..... 2,400
Prepaid Insurance
Adjustment A2 – Record
insurance unused as of
December 31.
Assets
Insurance Expense
P2..... 2,400
Expenses
C3 - 26
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
A2
A2
Insurance Expense
P2..... 2,400 A2.....2,300
Expenses
C3 - 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.
Cash
Adjustment A3 – Record rent
earned for December.
S1..... 360
Unearned Rent
Liabilities
S1..... 360
Rent Revenue
Revenues
C3 - 28
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.
Cash
Adjustment A3 – Record rent
earned for December.
S1..... 360
Unearned Rent
A3..... 120
A3
Liabilities
S1..... 360
A3
Rent Revenue
A3.....120
Revenues
C3 - 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.
Cash
Adjustment A4 – Record rent
unearned as of December 31.
S2..... 360
Unearned Rent
Liabilities
Rent Revenue
S2.....360
Revenues
C3 - 30
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.
Cash
Adjustment A4 – Record rent
unearned as of December 31.
S2..... 360
Unearned Rent
Liabilities
A4..... 240
A4
A4
Rent Revenue
A4..... 240
S2.....360
Revenues
C3 - 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
C3 - 32
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
A5
Wages Expense
Bal.....4,275
A5.....250
A5
Expenses
C3 - 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
C3 - 34
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
A6
Fees Earned
Bal....16,340
A6.....500
A6
Revenues
C3 - 35
Summary of Adjustments
Buying Side
Deferred
Expenses
Assets
A1
A2
Expenses
Rearranging
the Debits
C3 - 36
Summary of Adjustments
Buying Side
Selling Side
Deferred
Expenses
Deferred
Revenues
Assets
Liabilities
A1
A2
A3
A4
Expenses
Revenues
Rearranging
the Debits
Rearranging
the Credits
C3 - 37
Summary of Adjustments
Buying Side
Selling Side
Accrued
Expenses
Liabilities
A5
Expenses
Adding a New
Transaction
C3 - 38
Summary of Adjustments
Buying Side
Selling Side
Accrued
Expenses
Accrued
Revenues
Liabilities
Assets
A5
A6
Expenses
Revenues
Adding a New
Transaction
Adding a New
Transaction
C3 - 39
Summary of Adjustments
Buying Side
Selling Side
Deferred
Expenses
Accrued
Expenses
Deferred
Revenues
Accrued
Revenues
Assets
Liabilities
Liabilities
Assets
A1
A2
Expenses
A5
Expenses
Rearranging Adding a New
the Debits
Transaction
A3
A4
Revenues
A6
Revenues
Rearranging Adding a New
the Credits
Transaction
C3 - 40
Financial Analysis and Interpretation
Objective: Use vertical analysis to compare financial
statement items with each other and with industry averages.
Comparative Income Statements
For the Years Ended December 31, 2003 and 2002
Fees earned
Operating expenses:
Wages expense
Rent expense
Vertical Analysis:
2003
Amount Percent
$ 187,500 100.0%
2002
Amount Percent
$ 150,000 100.0%
$ 60,000
15,000
$ 45,000
Wages expense $ 60,000
Fees earned
$ 187,500
32.0%
8.0
30.0%
= 32.0%
C3 - 41
Chapter F3
Power Notes
The Matching Concept and the Adjusting Process
This is the last slide in Chapter F3.
Note: To see the topic slide, type 2 and press Enter.
C3 - 42