1) The document discusses the matching concept and adjusting process in accounting. It covers topics like deferrals, accruals, adjusting entries, and analyzing financial statements. 2) Examples are provided of adjusting entries for deferred expenses, deferred revenue, accrued expenses, and accrued revenue to properly match revenues and expenses between accounting periods. 3) The goal of adjustments is to ensure revenues and expenses are recorded in the appropriate period according to the accrual basis of accounting.

1. Chapter 3 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
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2. Chapter 3 Power Notes
The Matching Concept and the Adjusting Process
Slide # Power Note Topics
3 • Reporting Revenue and Expense
6 • The Matching Concept
9 • Trial Balance, Chart of Accounts
20 • Deferrals and Accruals
36 • Summary of Adjustments
41 • Vertical Analysis
Note: To select a topic, type the slide # and press Enter.
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3. Reporting Revenue and Expense
TWO METHODS
Cash Basis of Accounting
Accrual Basis of Accounting
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4. 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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5. 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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6. The Matching Concept
Debits = Credits
Liabilities
Assets Owner’s
Equity
Expenses Revenues
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7. The Matching Concept
Debits = Credits
Liabilities
Assets Owner’s
Equity
Net
Income
Expenses Revenues
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8. 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.
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9. NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
Assets
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
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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
Liabilities 21 Accounts Payable 900
23 Unearned Rent 360
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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
Owner’s 31 Chris Clark, Capital 25,000
Equity 32 Chris Clark, Drawing 4,000
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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
Revenue 41 Fees Earned 16,340
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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
Expenses 54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
42,600 42,600
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14. 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
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15. NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 42 Rent Revenue
14 Supplies
5. Expenses
15 Prepaid Insurance
51 Wages Expense
17 Land
52 Rent Expense
18 Office Equipment
53 Depreciation Expense
19 Accumulated Depreciation
54 Utilities Expense
2. Liabilities 55 Supplies Expense
21 Accounts Payable 56 Insurance Expense
22 Wages Payable 59 Miscellaneous Expense
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
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16. NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 42 Rent Revenue
14 Supplies
5. Expenses
15 Prepaid Insurance
51 Wages Expense
17 Land
52 Rent Expense
18 Office Equipment
53 Depreciation Expense
19 Accumulated Depreciation
54 Utilities Expense
2. Liabilities 55 Supplies Expense
21 Accounts Payable 56 Insurance Expense
22 Wages Payable 59 Miscellaneous Expense
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
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17. NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 42 Rent Revenue
14 Supplies
5. Expenses
15 Prepaid Insurance
51 Wages Expense
17 Land
52 Rent Expense
18 Office Equipment
53 Depreciation Expense
19 Accumulated Depreciation
54 Utilities Expense
2. Liabilities 55 Supplies Expense
21 Accounts Payable 56 Insurance Expense
22 Wages Payable 59 Miscellaneous Expense
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
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18. NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 42 Rent Revenue
14 Supplies
5. Expenses
15 Prepaid Insurance
51 Wages Expense
17 Land
52 Rent Expense
18 Office Equipment
53 Depreciation Expense
19 Accumulated Depreciation
54 Utilities Expense
2. Liabilities 55 Supplies Expense
21 Accounts Payable 56 Insurance Expense
22 Wages Payable 59 Miscellaneous Expense
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
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19. NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 42 Rent Revenue
14 Supplies
5. Expenses
15 Prepaid Insurance
51 Wages Expense
17 Land
52 Rent Expense
18 Office Equipment
53 Depreciation Expense
19 Accumulated Depreciation
54 Utilities Expense
2. Liabilities 55 Supplies Expense
21 Accounts Payable 56 Insurance Expense
22 Wages Payable 59 Miscellaneous Expense
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
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20. Adjustments – Deferrals and Accruals
Revenues Current Period Future Period
Deferrals Cash Received Revenue Recorded
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21. Adjustments – Deferrals and Accruals
Revenues Current Period Future Period
Deferrals Cash Received Revenue Recorded
Accruals Revenue Recorded Cash Received
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22. Adjustments – Deferrals and Accruals
Revenues Current Period Future Period
Deferrals Cash Received Revenue Recorded
Accruals Revenue Recorded Cash Received
Expenses
Current Period Future Period
Deferrals Cash Paid Expense Recorded
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23. Adjustments – Deferrals and Accruals
Revenues Current Period Future Period
Deferrals Cash Received Revenue Recorded
Accruals Revenue Recorded Cash Received
Expenses
Current Period Future Period
Deferrals Cash Paid Expense Recorded
Accruals Expense Recorded Cash Paid
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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
Cash insurance used for
P1..... 2,400 December, $100.
Prepaid Insurance
Assets
P1..... 2,400
Insurance Expense
Expenses
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25. 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
Cash insurance used for
P1..... 2,400 December, $100.
Prepaid Insurance
Assets
P1..... 2,400 A1..... 100
A1
Insurance Expense A1
A1.....100 Expenses
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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
Cash insurance unused as of
P2..... 2,400 December 31.
Prepaid Insurance
Assets
Insurance Expense
P2..... 2,400 Expenses
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27. 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
Cash insurance unused as of
P2..... 2,400 December 31.
Prepaid Insurance
Assets
A2..... 2,300
A2
A2
Insurance Expense
P2..... 2,400 A2.....2,300 Expenses
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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.
Adjustment A3 – Record rent
Cash
earned for December.
S1..... 360
Unearned Rent
Liabilities
S1..... 360
Rent Revenue
Revenues
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29. 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
Cash
earned for December.
S1..... 360
Unearned Rent
Liabilities
A3..... 120 S1..... 360
A3
A3
Rent Revenue
A3.....120 Revenues
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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.
Adjustment A4 – Record rent
Cash
unearned as of December 31.
S2..... 360
Unearned Rent Liabilities
Rent Revenue
S2.....360 Revenues
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31. 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
Cash
unearned as of December 31.
S2..... 360
Unearned Rent Liabilities
A4..... 240
A4
A4
Rent Revenue
A4..... 240 S2.....360 Revenues
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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
Wages Expense
Bal.....4,275 Expenses
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33. 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 A5
Bal.....4,275 Expenses
A5.....250
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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
Fees Earned
Bal....16,340 Revenues
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35. 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
A6
Bal....16,340 Revenues
A6.....500
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36. Summary of Adjustments
Buying Side
Deferred
Expenses
Assets
A1 A2
Expenses
Rearranging
the Debits
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37. Summary of Adjustments
Buying Side Selling Side
Deferred Deferred
Expenses Revenues
Assets Liabilities
A1 A2 A3 A4
Expenses Revenues
Rearranging Rearranging
the Debits the Credits
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38. Summary of Adjustments
Buying Side Selling Side
Accrued
Expenses
Liabilities
A5
Expenses
Adding a New
Transaction
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39. Summary of Adjustments
Buying Side Selling Side
Accrued Accrued
Expenses Revenues
Liabilities Assets
A5 A6
Expenses Revenues
Adding a New Adding a New
Transaction Transaction
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40. Summary of Adjustments
Buying Side Selling Side
Deferred Accrued Deferred Accrued
Expenses Expenses Revenues Revenues
Assets Liabilities Liabilities Assets
A1 A2 A5 A3 A4 A6
Expenses Expenses Revenues Revenues
Rearranging Adding a New Rearranging Adding a New
the Debits Transaction the Credits Transaction
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41. 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
2003 2002
Amount Percent Amount Percent
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
Vertical Analysis:
Wages expense $ 60,000
= 32.0%
Fees earned $ 187,500
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42. Chapter 3 Power Notes
The Matching Concept and the Adjusting Process
This is the last slide in Chapter 3.
Note: To see the topic slide, type 2 and press Enter.
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