Chapter 3

The Matching Concept

and
the Adjusting Process

C3 - 1

Learning Objectives

1. The Matching Concept

2. Nature of the Adjusting Process
3. Recording Adjusting Entries
4. Summary of Adjustment Process

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

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
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

C3 - 9

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

C3 - 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
21 Accounts Payable 900
23 Unearned Rent 360
Owner’s 31 Chris Clark, Capital 25,000
Equity 32 Chris Clark, Drawing 4,000

C3 - 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
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 4,000
Revenue 41 Fees Earned 16,340

C3 - 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
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

C3 - 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
54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
42,600 42,600

C3 - 14
 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

C3 - 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

C3 - 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

C3 - 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

C3 - 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

C3 - 19

Adjustments – Deferrals and Accruals

Revenues Current Period Future Period

Deferrals Cash Received Revenue Recorded

C3 - 20
Adjustments – Deferrals and Accruals

Revenues Current Period Future Period

Deferrals Cash Received Revenue Recorded

Accruals Revenue Recorded Cash Received

C3 - 21

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

C3 - 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

Accruals 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.

Adjustment A1 – Record
Cash insurance used for
P1..... 2,400 December, $100.

Prepaid Insurance
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
Cash insurance used for
P1..... 2,400 December, $100.

Prepaid Insurance
Assets
P1..... 2,400 A1..... 100
A1
Insurance Expense A1

A1.....100 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.

Adjustment A2 – Record
Cash insurance unused as of
P2..... 2,400 December 31.

Prepaid Insurance
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
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

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.

Adjustment A3 – Record rent

Cash
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.

Adjustment A3 – Record rent

Cash
earned for December.
S1..... 360

Unearned Rent
Liabilities
A3..... 120 S1..... 360
A3
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.

Adjustment A4 – Record rent

Cash
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.

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

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 A5
Bal.....4,275 Expenses
A5.....250

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
A6
Bal....16,340 Revenues
A6.....500

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 Deferred
Expenses Revenues

Assets Liabilities

A1 A2 A3 A4

Expenses Revenues

Rearranging Rearranging
the Debits 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 Accrued
Expenses Revenues

Liabilities Assets

A5 A6

Expenses Revenues

Adding a New Adding a New

Transaction Transaction

C3 - 39

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

C3 - 40