12-Jul-19

Chapter 3
The Matching Concept and
The Adjusting Process

Time difference


Remember “accounting period concept”?



This is where all the problems in
accounting start!!! Accountants must
determine in which period to report the
REVENUES and EXPENSES of the
business.



So they use: Cash Basis OR Accrual Basis

Objectives

Cash Basis

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



Revenues and expenses are reported in
the profit and loss statement in the
period in which cash is received or paid.



Example: Your company purchased a
machine in March on credit. The indebted
amount is paid in May.

Content

Accrual Basis

Time difference!
Cash Basis and Accrual Basis
 Matching concept
 Adjusting process



Revenues are reported in the profit and
loss statement in the period in which they
are earned.




Revenue is reported when services are
provided to customers in March! (Cash
may or may not be received)






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12-Jul-19

Difference between
Deferrals and Accruals

Matching Concept


Accounting concept that supports
reporting revenues and related expenses
in the same period is called the Matching
Concept, or Matching Principle




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

Adjusting Process






At the end of the month or year, some
accounts require “updating”
Ex: Supplies balance, Depreciation
Account, etc

Current Accounting
Period

Cash Received
or Paid

Deferrals


Journal entries that update accounts are
called Adjusting entries

Revenue
Earned or
Expense
Incurred

Accruals

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)


Future Accounting
Period

Revenue
Earned or
Expense
Incurred


Cash Received
or Paid

Deferred Expenses


Initially recorded as assets but are
expected to become expenses.



Supplies and Supplies Expense
Prepaid Insurance and Insurance Expense



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12-Jul-19

Supplies and Supplies Expense

Supplies and Supplies Expense
(Cont)

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
prepare your T-account for this
transaction.

What is the effect of omitting
adjusting entries?

1.1 Bought supplies with cost $1,000
Amount of supplies used during the
month $350
 The supplies account balance at the end
of the month?



Expenses

Assets

Owner’s
Equity

Prepaid Insurance and Insurance

Expense

Deferred Revenue


Initial recorded as liabilities but are
expected to become revenues.



Think of any example?



Unearned Revenue and Revenue

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12-Jul-19

Unearned Rent and Rent Revenue


Let assume I have a house to rent out for
students @ $100 per month.



What if you guys sign a 6-months rent

contract with me at 1st December? (Paid
in full)

Accrued Expenses



What if at the end of March Mr Vuong has
paid you guys just 2 mil?



How to treat this unpaid salaries at the
end of the month?

Accrued Revenue



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



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



Accrued expenses are services that are paid

for after the services has been performed.



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



Salaries owned to employees


Account Receivable and Fees Earned



Salaries Payable and Salaries Expense

Salaries Payable and Salaries
Expense
You are hired as sale assistants in Mr
Vuong’s food store on 1st March
 Salaries: 3 mil per month
 How Mr Vuong record this at the beginning
and the end of March?


Salaries Payable and Salaries
Expense


Account Receivable and
Fees Earned


I signed an agreement with students on
January 15th . Binding by the agreement, I will
help students to answer their accountingrelated-questions @ $10 per question.
Invoice will be sent to students on the 15th
of each month. Given that I had answered 20
questions at the end of January.



How do I record this at the end of the
month?

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12-Jul-19

Fixed Assets and Depreciation

Fixed Assets and Depreciation


Fixed Assets:
◦ Permanent
◦ Duration




Used to earn
Revenue

Depreciation:

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

Dr




Accrued Expense

Dr



Accrued Revenue

Dr



Depreciation

Dr

◦ Decrease in usefulness

Recorded as
expenses

Dr



Cr

Cr


Cr

Cr

Cr

Fixed Assets and Depreciation


Company bought a machine on 1/1/20X0
at cost of $10.000. At the year end, the
estimated amount of depreciation for the
year is assumed to be $1.000



How to record this at the year end?

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