ĐH MỞ BÀI GIẢNG Chapter 3 The Matching Concept and The Adjusting Process TRƯỜNG ĐẠI HỌC MỞ BÀI GIẢNG GIÁO TRÌNH

Cash Basis the profit and loss statement in the period in which cash is received or paid.. Expenses are matched with the related revenues and are reported when the expenses occur, not w

Chapter 3

The Matching Concept and

The Adjusting Process

Vũ Quốc Thông (PhD.)

Objectives

 Explain how the matching concept relates to the accrual basis of

accounting

 Explain why adjustments are necessary and list the characteristics

of adjusting entries

 Journalise entries for accounts requiring adjustment

Content

 Time difference

 Cash Basis and Accrual Basis

 Matching concept

 How they are related?

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Time difference

 Recall Ch1 “accounting period concept”?

determine in which period to report the

REVENUES and EXPENSES of the

business

 Cash Basis or Accrual Basis

Cash Basis

the profit and loss statement in the period

in which cash is received or paid

electronic and received the supplier’s invoice by the end of March The owing amount is paid in the early of April

 How the company record this electronic expense?

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loss statement in the period in which they

are earned Expenses are matched with

the related revenues and are reported

when the expenses occur, not when the

cash is paid

when services are provided to customers in March! (cash may or may not be received) Accrual Basis

Matching Concept

 Accounting concept that supports reporting revenues and related expenses in the same period is called

the Matching Concept, or Matching Principle

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Notes

 Accrual basis earning revenues –– incurring expenses

>> apply: Matching concepts

 Cash basis:

>> not apply: Matching concepts

matched

In the same period…

Exercise 1

 Consider a firm that sells merchandises from rented shop space Suppose the firm obtain the revenues from sales on the quarter at $600,000

However, the firm's customers may not pay all they owe during the quarter

 And, also suppose that the firm pays $30,000 for floor-space rent each month, for using the shop

The payment is due in advance on the first of each month

In this quarter, by applying the matching concept, you help the firm to report the amount of revenues and expenses?

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Adjusting Process

 At the end of the month or year, some accounts require “updating”

 E.g office Supplies balance, Depreciation account, etc

are called Adjusting entries

Nature of Adjusting entries

 Affect at least one profit and loss account (revenue or expense) and one balance sheet account (asset or

liability)

 Deferrals (expenses and revenues)

 Accruals (expenses and revenues)

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Difference between Deferrals and Accruals

 Deferrals

◦ Cash received or paid in the current period, but these items relates to future period

 Accruals

◦ Cash will not be received or paid until a future period, the revenue and expense relates to the current period

Current Accounting Period

Future Accounting Period

Cash Received or Paid

Revenue Earned or Expense Incurred

Deferrals

Accruals

Revenue Earned or Expense Incurred

Cash Received or Paid

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Note on Acct Name!

Deferred Expenses

 Initially recorded as assets but are expected to become expenses

 E.g

◦ Office Supplies and Supplies Expense

◦ Prepaid Insurance and Insurance Expense

Supplies and Supplies Expense

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Supplies and Supplies Expense (cont.)

 1.1: Company bought office supplies

on account with cost $1,000

 Amount of supplies used during the month $350

 The supplies account balance at the end of the month?

Analyse & record transactions?

Prepaid Insurance and Insurance Expense

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Prepaid Insurance and Insurance Expense

 The company bought an 12-months insurance contract(@ cost of $12,000) for their inventory on 1st of December

 How would they record this at the beginning and end of December?

Let’s prepare T-account for this transaction

What is the effect of omitting adjusting entries?

Expenses

Owner’s Equity Assets

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Deferred Revenue

 Initial recorded as liabilities but are expected to become revenues

Think of any example?

 Unearned Rent and Rent Revenue

Unearned Rent and Rent Revenue

 Let assume my company have a house

to rent out for students @ $100 per month

 What if you guys sign a 6-months rent contract with my company at 1st

December (full amount is paid)

Let’s prepare T-account for this transaction?

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Analyse & record transactions?

Accrued Expenses

 These are expenses that have been incurred but have not been recorded in the accounts

 Accrued expenses are services that are paid for after the services has been performed

E.g.?

◦ Salaries owned to employees

◦ Salaries Payable and Salaries Expense

Salaries Payable and Salaries Expense

 You are hired as sale assistant in Mr

Vuong’s food store on 1st March

 Salaries: 5 million VNĐ per month

How the food store record this at the beginning and the end of March?

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Analyse & record transactions?

Salaries Payable and Salaries Expense

 What if at the end of March the food store has paid you just 2 million VNĐ in cash?

 How to treat the unpaid salary amount at the end of March? (the food store record what?)

Accrued Revenue

 Are revenues that have been earned but have not been recorded in the accounts

 E.g

◦ Lawyer has provided services to a client but has not send an invoice still the end of the month

◦ Account Receivable and Service Revenue

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students on January 15th Binding by the agreement, the firm will help students to answer their accounting-related-questions

@ $10 per question Invoice will be sent

to students on the 15th of each month

Given that the firm had answered 20 questions at the end of January

 How does the firm record this at the end

of the month?

Fixed Assets and Depreciation

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Fixed Assets and Depreciation

 Fixed Assets:

◦ Permanent

◦ Duration

 Depreciation:

◦ Decrease in usefulness

Used to earn Revenue

Recorded

as expenses

Fixed Assets and Depreciation

 Company bought a machine on 1/1/20X0

at cost of $10.000 by cash and started to use for business At the year end, the estimated amount of depreciation for the year is assumed to be $1.000

 How to record these related transactions:

◦ When purchasing the machine?

◦ At the year end?

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Analyse & record transactions?

Fixed Assets and Depreciation

 Accumulated depreciation accounts are called Contra Accounts, or Contra Asset Accounts

 Fixed assets are presented on the BS

at their Net Book Value (Cost of Fixed Assets – Accumulated Depreciation)

Summary of Adjusting Process

 Deferred Expense

 Deferred Revenue

 Accrued Expense

 Accrued Revenue

 Depreciation

Dr

Cr

Dr

Cr

Dr

Cr

Dr

Cr

Dr

Cr

?

?

?

?

?

?

?

?

?

?

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How matching concept relates to

the Accrual basis of accounting?

 The accrual basis of accounting requires the use of an adjusting process at the end of the month or year to match revenues and expenses properly!

Homework for Ch.3

 Multiple choice (p 116)

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