C3 - 1 Learning Objectives Power Notes The Matching Concept and the Adjusting Process The Matching...

C3 - 1

Learning Objectives

Power Notes The Matching Concept and the Adjusting Process The Matching Concept and the Adjusting Process

1. The Matching Concept

2. Nature of the Adjusting Process

3. Recording Adjusting Entries

4. Summary of Adjustment Process

5. Financial Analysis and Interpretation

Chapter F3

C3

C3 - 2

• Reporting Revenue and Expense• The Matching Concept• Trial Balance, Chart of Accounts• Deferrals and Accruals• Summary of Adjustments• Vertical Analysis

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Chapter F3

The Matching Concept and the Adjusting Process The Matching Concept and the Adjusting Process

Power Notes

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NetSolutionsUnadjusted Trial Balance

December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Capital Stock 25,00033 Dividends 4,00041 Fees Earned 16,34051 Wages Expense 4,27552 Rent Expense 1,60054 Utilities Expense 98555 Supplies Expense 80059 Miscellaneous Expense 455

42,600 42,600

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NetSolutionsExpanded Chart of Accounts

Balance Sheet Income Statement

1. Assets11 Cash12 Accounts Receivable14 Supplies15 Prepaid Insurance17 Land18 Office Equipment19 Accumulated Depreciation

2. Liabilities21 Accounts Payable22 Wages Payable23 Unearned Rent

3. Stockholders’ Equity31 Capital Stock32 Retained Earnings33 Dividends

4. Revenue41 Fees Earned42 Rent Revenue

5. Expenses51 Wages Expense52 Rent Expense53 Depreciation Expense54 Utilities Expense55 Supplies Expense56 Insurance Expense59 Miscellaneous Expense

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TWO METHODS

Reporting Revenue and ExpenseReporting Revenue and Expense

Cash Basis of Accounting

Accrual Basis of Accounting

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Adjustments – Accrued ExpenseAdjustments – Accrued Expense

Wages Payable

Wages 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.

A5..... 250

Bal.....4,275 Expenses

Liabilities

A5

A5

A5.....250

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Adjustments – Accrued RevenueAdjustments – Accrued Revenue

Accounts Receivable

Fees Earned

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.

A6..... 500

Bal....16,340 Revenues

Assets

A6

A6

A6.....500

Bal.....2,220

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Financial Analysis and InterpretationFinancial Analysis and InterpretationFinancial Analysis and InterpretationFinancial Analysis and Interpretation

Objective: Use vertical analysis to compare financial statement items with each other and with industry averages.

Comparative Income StatementsFor the Years Ended December 31, 2003 and 2002

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

2003 2002 Amount Percent Amount Percent

Vertical Analysis: Vertical Analysis:

Wages expense $ 60,000Fees earned $ 187,500

= 32.0%

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Cash Basis of AccountingCash 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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Accrual Basis of AccountingAccrual 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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The Matching ConceptThe Matching ConceptThe Matching ConceptThe Matching Concept

Assets

Liabilities

Owner’sEquity

Debits = Credits

Expenses Revenues

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Assets

Liabilities

Owner’sEquity

Debits = Credits

Expenses Revenues

NetIncome

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Assets

Liabilities

Owner’sEquity

Debits = Credits

Net income is determined by properly matching expenses and revenues.

Expenses Revenues

NetIncome

matching

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December 31, 2002

1111 CashCash 2,0652,0651212 Accounts ReceivableAccounts Receivable 2,2202,2201414 SuppliesSupplies 2,0002,0001515 Prepaid InsurancePrepaid Insurance 2,4002,4001717 LandLand 20,00020,0001818 Office EquipmentOffice Equipment 1,8001,800

AssetsAssets

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,8002121 Accounts PayableAccounts Payable 9009002323 Unearned RentUnearned Rent 360360

LiabilitiesLiabilities

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 3603131 Capital StockCapital Stock 25,00025,0003333 DividendsDividends 4,0004,000

Stockholders’Stockholders’EquityEquity

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Capital Stock 25,00033 Dividends 4,0004141 Fees EarnedFees Earned 16,34016,340RevenueRevenue

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Pat King, Capital 25,00032 Pat King, Drawing 4,00041 Fees Earned 16,3405151 Wages ExpenseWages Expense 4,2754,2755252 Rent ExpenseRent Expense 1,6001,6005454 Utilities ExpenseUtilities Expense 9859855555 Supplies ExpenseSupplies Expense 8008005959 Miscellaneous ExpenseMiscellaneous Expense 455455

42,600 42,600

ExpensesExpenses

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Adjustments – Deferrals and AccrualsAdjustments – Deferrals and AccrualsAdjustments – Deferrals and AccrualsAdjustments – Deferrals and Accruals

Current Period Future Period

Cash Received Revenue Recorded Deferrals Cash Received

Revenues

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Accruals Revenue Recorded Cash Received

Revenues

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Cash Paid Expense Recorded

Expenses

Cash Paid


Revenues

Deferrals

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Expense Recorded Cash Paid

Cash Paid Expense Recorded

Expenses

Cash Paid


Revenues

Deferrals

Accruals

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Adjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred Expense

P1..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P1..... 2,400

On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400.

Adjustment A1 – Record insurance used for December, $100.

Expenses

Assets

Example P1 – Purchase initially recorded as an asset.Example P1 – Purchase initially recorded as an asset.

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Adjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred Expense

P1..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P1..... 2,400


Adjustment A1 – Record insurance used for December, $100.

A1..... 100

A1.....100 Expenses

Assets

A1

Example P1 – Purchase initially recorded as an asset.Example P1 – Purchase initially recorded as an asset.

A1

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Adjustments – Deferred ExpenseAdjustments – Deferred Expense

P2..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P2..... 2,400


Adjustment A2 – Record insurance unused as ofDecember 31.

Expenses

Assets

Example P2 – Purchase initially recorded as an expense.Example P2 – Purchase initially recorded as an expense.

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Adjustments – Deferred ExpenseAdjustments – Deferred Expense

P2..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P2..... 2,400


Adjustment A2 – Record insurance unused as ofDecember 31.

A2..... 2,300

A2.....2,300 Expenses

Assets

A2

Example P2 – Purchase initially recorded as an expense.Example P2 – Purchase initially recorded as an expense.

A2

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Adjustments – Deferred RevenueAdjustments – Deferred Revenue

Cash

Unearned Rent

Rent Revenue

S1..... 360

On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1.

Adjustment A3 – Record rent earned for December.

S1..... 360

Revenues

Liabilities

Example S1 – Sale initially recorded as a liability.Example S1 – Sale initially recorded as a liability.

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A3..... 120

Cash

Unearned Rent

Rent Revenue

S1..... 360


Adjustment A3 – Record rent earned for December.

S1..... 360

A3.....120 Revenues

Liabilities

A3

Example S1 – Sale initially recorded as a liability.Example S1 – Sale initially recorded as a liability.

A3

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Cash

Unearned Rent

Rent Revenue

S2..... 360


Adjustment A4 – Record rent unearned as of December 31.

S2.....360 Revenues

Liabilities

Example S2 – Sale initially recorded as revenue.Example S2 – Sale initially recorded as revenue.

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A4..... 240

Cash

Unearned Rent

Rent Revenue

S2..... 360


Adjustment A4 – Record rent unearned as of December 31.

A4..... 240

S2.....360 Revenues

Liabilities

A4

Example S2 – Sale initially recorded as revenue.Example S2 – Sale initially recorded as revenue.

A4

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Adjustments – Accrued ExpenseAdjustments – Accrued Expense

Wages Payable

Wages 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.

Bal.....4,275 Expenses

Liabilities

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Adjustments – Accrued RevenueAdjustments – Accrued Revenue

Accounts Receivable

Fees Earned

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.

Bal....16,340 Revenues

AssetsBal.....2,220

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Summary of AdjustmentsSummary of Adjustments

DeferredExpenses

Expenses

Assets

A1 A2

Buying SideBuying Side

Rearrangingthe Debits

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DeferredExpenses

Expenses

Assets

A1 A2

DeferredRevenues

Revenues

Liabilities

A3 A4

Buying SideBuying Side Selling SideSelling Side


Rearrangingthe Credits

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Expenses

Liabilities

A5

AccruedExpenses


Adding a NewTransaction

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Expenses

Liabilities

A5

Revenues

Assets

A6

AccruedExpenses




AccruedRevenues

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DeferredExpenses

Expenses

Assets

A1 A2

Expenses

Liabilities

A5

DeferredRevenues

Revenues

Liabilities

A3 A4

Revenues

Assets

A6

AccruedExpenses




Rearrangingthe Credits


AccruedRevenues

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Power Notes

Chapter F3

The Matching Concept and the Adjusting Process The Matching Concept and the Adjusting Process

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C3 - 1 Learning Objectives Power Notes The Matching Concept and the Adjusting Process The Matching...

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