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The Matching Concept. …and the Adjustment Process. The Accounting Period Concept. The Cash Basis may be used by small service businesses, who have few payables and receivables. The Cash Basis of Accounting.

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the matching concept

The Matching Concept

…and the Adjustment Process

slide2

The Accounting Period Concept

The Cash Basis may be used by small service businesses, who have few payables and receivables.

The Cash Basis of Accounting

The Accrual Basis is normally required by Generally Accepted Accounting Principles (GAAP)

This is known as theMatching Principle

The Accrual Basis of Accounting

the accrual basis
The Accrual Basis

Four basic items require adjusted entries……

slide5

Income Statement

Journal – Adjusting Entry

after posting ….

Balance Sheet

Assets Liabilities

Deferred (Prepaid) Expenses

Initially recorded as assets, but become expenses over time, or as consumed.

Example: Prepaid Insurance $600 for 3 months. At closing, 1month ($200) used up.

Example: Prepaid Insurance is now only $400, not $600 as before.

Owners’ Equity

slide6

Adjustment Summary – Deferred Expense

Adjusting Entry

Debit Expense

Credit Asset

If you don’t do this…..

On the Income Statement

Expenses too low and Net Income too high!

On the Balance Sheet

Assets too high and Owners’ Equity too high!

slide7

Income Statement

Journal – Adjusting Entry

after posting ….

Balance Sheet

Assets Liabilities

Deferred (Unearned) Revenues

Initially recorded as Liabilities, but become revenues over time, or through normal business.

Example: Weekly magazine receives $104 for one year subscription ($2/week). At closing , 20 weeks already sent.

Example: Unearned Subscriptions is now only $64, not $104 as before.

Owners’ Equity

slide8

Adjustment Summary – Deferred Revenues

Adjusting Entry

Debit Liability

Credit Revenue

If you don’t do this…..

On the Income Statement

Revenues too low and Net Income too low!

On the Balance Sheet

Liabilities too high and Owners’ Equity too low!

slide9

Income Statement

Journal – Adjusting Entry

Example: A painter is 60% finished on a job that will pay him $2,000 when finished.

Accrued Assets (Revenues)

Revenues earned but not yet recorded.

after posting ….

Balance Sheet

Assets Liabilities

Owners’ Equity

slide10

Adjustment Summary – Accrued Revenues

Adjusting Entry

Debit Asset

Credit Revenue

If you don’t do this…..

On the Income Statement

Revenues too low and Net Income too low!

On the Balance Sheet

Assets too low and Owners’ Equity too low!

slide11

Income Statement

Journal – Adjusting Entry

Example: A secretary gets her monthly salary of $1,800 at the end of the month. Accounts are closed on the 15th.

Accrued Liabilities (Expenses)

Expenses incurred but not yet recorded.

after posting ….

Balance Sheet

Assets Liabilities

Owners’ Equity

slide12

Adjustment Summary – Accrued Expense

Adjusting Entry

Debit Expense

Credit Liability

If you don’t do this…..

On the Income Statement

Expenses too low and Net Income too high!

On the Balance Sheet

Liabilities too low and Owners’ Equity too high!

slide14

Income Statement

Journal – Adjusting Entry

after posting ….

Balance Sheet

Assets Liabilities

Office Equipment - Net

Initially recorded as assets, but become expensed (depreciated) over time.

Example: A computer is bought for $1,000. It will be depreciated over 5 years to $0 value (or $200 per year. After one year…..

Example: The Net Value of the computer is now $800. After next year it will have a book value only $600.

Owners’ Equity

slide15

Adjustment Summary – Fixed Asset Depreciation

Adjusting Entry

Debit Expense

Credit Contra-Asset

If you don’t do this…..

On the Income Statement

Expenses too low and Net Income too high!

On the Balance Sheet

Assets too high and Owners’ Equity too high!

slide16

Summary of Adjusting Entries

  • Deferred (Prepaid) Expenses
    • Adjustment: Debit (add) Expense and Credit (subtract) Asset

Example:

Prepaid Insurance and Insurance Expense

  • Deferred (Unearned) Revenues
    • Adjustment: Debit (subtract) Liability and Credit (add) Revenue

Example: Equipment Depreciation Expense and Accumulated Depreciation

Example: Prepaid Subscriptions and Subscription Sales

  • Accrued Assets (Revenues)
    • Adjustment: Debit (add) Acct. Receivable and Credit (add) Revenue

Example: Painted Fees and Acct.s Payable

  • Accrued Liabilities (Expenses)
    • Adjustment: Debit (add) Expense and Credit (add) Acct. Payable

Example:

Wages Expense and Wages Payable

  • Depreciation of Fixed Asset
    • Adjustment: Debit (add) Depreciation Expense and Credit (add) Accumulated Depreciation, which will Credit (subtract) Net Asset Value