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

Vũ Quốc Thông (PhD.) 10/10/2020 Chapter 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  Vũ Quốc Thông (PhD.) 10/10/2020 Content Time difference  Cash Basis and Accrual Basis  Matching concept  How they are related?  Time difference  Recall Ch1 “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  Cash Basis or Accrual Basis Vũ Quốc Thông (PhD.) 10/10/2020 Cash Basis  Revenues and expenses are reported in the profit and loss statement in the period in which cash is received or paid  Example: Your company already used 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?  Accrual Basis  Revenues are reported in the profit and 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  Example: Company’s revenue is reported when services are provided to customers in March! (cash may or may not be received) Vũ Quốc Thông (PhD.) 10/10/2020 Matching Concept  Accounting concept that supports reporting revenues and related expenses in the same period is called the Matching Concept, or Matching Principle Notes In the same period… Accrual basis matched earning revenues –– incurring expenses >> apply: Matching concepts  Cash basis: >> not apply: Matching concepts  Vũ Quốc Thông (PhD.) 10/10/2020 Exercise  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? Adjusting Process  At the end of the month or year, some accounts require “updating”  E.g office Supplies balance, Depreciation account, etc  Journal entries that update accounts are called Adjusting entries 10 Vũ Quốc Thông (PhD.) 10/10/2020 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)  11 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 12 Vũ Quốc Thông (PhD.) 10/10/2020 Note on Acct Name! Current Accounting Period Future Accounting Period Cash Received or Paid Deferrals Revenue Earned or Expense Incurred Accruals Revenue Earned or Expense Incurred Cash Received or Paid 13 Deferred Expenses  Initially recorded as assets but are expected to become expenses  E.g ◦ Office Supplies and Supplies Expense ◦ Prepaid Insurance and Insurance Expense 14 Vũ Quốc Thông (PhD.) 10/10/2020 Supplies and Supplies Expense 15 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? 16 Vũ Quốc Thông (PhD.) 10/10/2020 Prepaid Insurance and Insurance Expense 17 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 Analyse & record transactions? 18 Vũ Quốc Thông (PhD.) 10/10/2020 What is the effect of omitting adjusting entries? Assets Expenses Owner’s Equity 19 Deferred Revenue  Initial recorded as liabilities but are expected to become revenues Think of any example?  Unearned Rent and Rent Revenue 20 10 Vũ Quốc Thông (PhD.) 10/10/2020 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?  Analyse & record transactions? 21 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 22 11 Vũ Quốc Thông (PhD.) 10/10/2020 Salaries Payable and Salaries Expense You are hired as sale assistant in Mr Vuong’s food store on 1st March  Salaries: million VNĐ per month  How the food store record this at the beginning and the end of March? Analyse & record transactions? 23 Salaries Payable and Salaries Expense  What if at the end of March the food store has paid you just million VNĐ in cash?  How to treat the unpaid salary amount at the end of March? (the food store record what?) 24 12 Vũ Quốc Thông (PhD.) 10/10/2020 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 25 Account Receivable and Service Revenue  Service Firm signed an agreement with 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? Analyse & record transactions? 26 13 Vũ Quốc Thông (PhD.) 10/10/2020 Tangible Fixed Assets and Depreciation 27 Fixed Assets and Depreciation  Fixed Assets: ◦ Permanent ◦ Duration  Used to earn Revenue Depreciation: ◦ Decrease in usefulness Recorded as expenses 28 14 Vũ Quốc Thông (PhD.) 10/10/2020 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? Analyse & record transactions? 29 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) 30 15 Vũ Quốc Thông (PhD.) 10/10/2020 Summary of Adjusting Process ? Dr  Deferred Expense  Deferred Revenue Dr  Accrued Expense Dr  Accrued Revenue Dr  Depreciation Dr Cr ? Cr ? Cr ? Cr ? Cr ? ? ? ? ? 31 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! 32 16 Vũ Quốc Thông (PhD.) 10/10/2020 Homework for Ch.3  Multiple choice (p 116) 33 17