Accounting 21th waren reeve fess chapter 03

Chapter The Matching Concept and the Adjusting Process Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Explain how the matching concept relates to the accrual basis ofAfter accounting studying After studying this this Explain why adjustments are should necessary and list the chapter, chapter, you you should characteristics of adjusting entries be able to: be able to: Journalize entries for accounts requiring adjustment Summarize the adjustment process and prepare an adjusted trial balance Use vertical analysis to compare financial statement items with each other and with industry averages The Matching Concept Reporting Revenue and Expenses TWO METHODS Cash Basis of Accounting Accrual Basis of Accounting Under the cash basis for the accounting period concept, revenues and expenses are reported in the income statement in the period in which cash is received or paid Under the accrual basis for the accounting period concept, revenues are reported in the income statement in the period in which they are earned Accrual Basis of Accounting  Revenue Revenue reported reported when when earned earned  Expense Expense reported reported when when incurred incurred  Properly Properly matches matches revenues revenues and and expenses expenses in in determining determining net net income income  Requires Requires adjusting adjusting entries entries at at end end of of period period The The matching matching concept concept supports supports reporting reporting revenues revenues and and related related expenses expenses in in the the same same period period Paid $10,000 for an advertising campaign for a $10,000 product thataswill recorded an be introduced asset in 2005 2003 2004 Sold the advertised $10,000 product expensed in 2005 to match revenues 2005 NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Unadjusted Unadjusted trial trial balance balance 2 2 20 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 000 00 16 340 00 275 00 600 00 985 00 800 00 455 00 42 600 00 42 600 00 Building Building A building has a limited life, so it must be depreciated The contra account used in the adjusting entry is Accumulated Depreciation—Building Equipment Equipment Because equipment has a limited life, it depreciates The contra account used is Accumulated Depreciation—Equipment NetSolutions NetSolutionsestimates estimatesthe the depreciation depreciation on on its its office office equipment equipment to to be be $50 $50 for for the the month month of of December December 16 17 18 19 31 Depreciation Expense 53 50 00 Accumulated Depreciation— 19 Office Equipment Accumulated Depreciation— Office Equipment 19 Dec 31 50 50 00 Depreciation Expense 53 Dec 31 50 NetSolutions’ NetSolutions’ balance balance sheet sheet would would show show the the office office equipment equipment at at cost, cost, less less the the accumulated accumulated depreciation depreciation Office equipment Less accumulated depreciation $1,800 50 $1,750 Book value Effect Effect of of Omitting Omitting Adjustment Adjustment Summary Summary of of Basic Basic Adjustments Adjustments NetSolutions’ Adjusted Trial Balance for December 31, 2005 41 NetSolutions Adjusted Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depreciation Accounts Payable Wages Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Rent Revenue Wages Expense Rent Expense Utilities Expense 065 00 720 00 760 00 300 00 20 000 00 800 00 50 900 250 240 25 000 00 00 00 00 00 000 00 16 840 00 120 00 525 00 600 00 985 00 Continued NetSolutions Trial Balance December 31, 2005 (Continued) Supplies Expense Insurance Expense Miscellaneous Expense 040 100 455 43 400 42 00 00 00 00 43 400 00 Vertical Analysis and Interpretation J Holmes, Attorney-at-Law Income Statements For the Years Ended December 31, 2005 and 2006 Fees earned Operating expenses: Wages expense Rent expense Utilities expense Supplies expense Miscellaneous exp Total operating expenses Net income 2006 2005 Amount Percent Amount Percent $187,500 $150,000 $60,000 15,000 12,500 2,700 2,300 $45,000 12,000 9,000 3,000 1,800 $92,500 $95,000 $70,800 $79,200 2006 2005 Amount Percent Amount Percent Fees earned $187,500 100.0% $150,000 100.0% Operating expenses: Wages expense $60,000 $45,000 Rent expense 15,000 12,000 Utilities expense 12,500 9,000 Supplies expense 2,700 3,000 Miscellaneous exp 2,300 1,800 Total operating expenses $92,500 $70,800 Net income $95,000 $79,200 2006 2005 Amount Percent Amount Percent Fees earned $187,500 100.0% Operating expenses: Wages expense $60,000 32.0% Rent expense 15,000 38.0% Utilities expense 12,500 Supplies expense 2,700 Miscellaneous exp 2,300 Total operating expenses $92,500 Net income $95,000 $150,000 100.0% $60,000 $60,000 $45,000 $187,500 $15,000 $187,500 $15,000 12,000 $187,500 $187,500 9,000 3,000 1,800 $70,800 $79,200 2006 2005 Amount Percent Amount Percent Fees earned $187,500 100.0% Operating expenses: Wages expense $60,000 32.0% Rent expense 15,000 8.0% Utilities expense 12,500 6.7% Supplies expense 2,700 1.4% Miscellaneous exp 2,300 1.2% Total operating expenses $92,500 49.3% Net income $95,000 50.7% $150,000 100.0% $45,000 12,000 9,000 3,000 1,800 30.0% 8.0% 6.0% 2.0% 1.2% $70,800 $79,200 47.2% 52.8% Chapter The The End End ... concept relates to the accrual basis ofAfter accounting studying After studying this this Explain why adjustments are should necessary and list the chapter, chapter, you you should characteristics... Concept Reporting Revenue and Expenses TWO METHODS Cash Basis of Accounting Accrual Basis of Accounting Under the cash basis for the accounting period concept, revenues and expenses are reported... Under the accrual basis for the accounting period concept, revenues are reported in the income statement in the period in which they are earned Accrual Basis of Accounting  Revenue Revenue reported