Chapter Chapter 33

Lecture 06Lecture 06

Lecture ReviewTransactionsRules of Debit and CreditJournalizingPosting into LedgersBalancing the Ledger AccountsErrorsCorrection of Errorshorizontal Analysis

The Matching Concept The Matching Concept and the Adjusting Processand the Adjusting Process

1. Explain how the matching concept relates to the accrual basis of accounting.

2. Explain why adjustments are necessary and list the characteristics of adjusting entries.

3. Journalize entries for accounts requiring adjustment.

4. Summarize the adjustment process and prepare an adjusted trial balance.

5. Use vertical analysis to compare financial statement items with each other and with industry averages.

The Matching Concept

TWO METHODS

Cash Basis of AccountingAccrual 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.

Revenue reported when earnedExpense reported when incurredProperly matches revenues and

expenses in determining net income

Requires adjusting entries at end of period

Revenue reported when earnedExpense reported when incurredProperly matches revenues and

expenses in determining net income

Requires adjusting entries at end of period

2009 2010

Paid $10,000 for an advertising campaign for a

product that will be introduced in

2003.

Sold the advertised product.

Paid Rs.10,000 for an advertising

campaign for a product that will be introduced in

2010.

Paid $10,000 for an advertising campaign for a

product that will be introduced in

2003.

Sold the advertised product.

Paid Rs.10,000 for an advertising

campaign for a product that will be introduced in

2010.

OpportunitiesTrial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Unadjusted trial

balance

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

Assets

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

Liabilities

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

OpportunitiesTrial Balance

December 31, 2010

Owner’s Equity

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

Revenue

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

Expenses

Opportunities Inc.Chart of Accounts

Balance Sheet Income Statement

1. AssetsCashAccounts ReceivableSuppliesPrepaid InsuranceLandOffice Equipment

2. LiabilitiesAccounts PayableWages PayableUnearned Rent

3. Owner’s EquityJavid Iqbal, CapitalJavid Iqbal, Drawing

4. RevenueFees EarnedRent Revenue

5. ExpensesWages ExpenseRent ExpenseDepreciation ExpenseUtilities ExpenseSupplies ExpenseInsurance ExpenseMiscellaneous Expense

Deferred Deferred Expenses Expenses (Prepaid (Prepaid

Expenses)Expenses)

Opportunities Inc.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Some of these supplies have been used. On December 31, a count reveals that Rs.760 of

supplies are on hand.

Some of these supplies have been used. On December 31, a count reveals that Rs.760 of

supplies are on hand.

Supplies Expense 1 240

Supplies 1 240

Supplies (balance on trial balance) Rs.2,000Supplies on hand, December 31 – 760Supplies used 1,240

Dec. 312010

Dec. 31 1,240Dec. 31 1,240

SuppliesBal. 2,000

Supplies ExpenseBal. 800

2,040760

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

The prepayment for 24 months of insurance does not reflect that

December’s insurance has theoretically expired.

The prepayment for 24 months of insurance does not reflect that

December’s insurance has theoretically expired.

31 Insurance Expense 100

Prepaid Insurance 100

Dec. 31 100 Dec. 31 100Prepaid Insurance

Bal. 2,400Insurance Expense

2,300

Deferred Revenue Deferred Revenue (Unearned (Unearned Revenue)Revenue)

Opportunities Inc.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Three months’ rent, Rs.360, was received on December 1. As of December 31, only Rs.120 has

been earned.

Three months’ rent, Rs.360, was received on December 1. As of December 31, only Rs.120 has

been earned.

31 Unearned Rent 120

Rent Revenue 120

Dec. 31 120 Dec. 31 120Unearned Rent

Bal. 360Rent Revenue

240

Accrued Accrued Expenses Expenses (Accrued (Accrued

Liabilities)Liabilities)

Opportunities Inc.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25 000Chris Clark, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

At the end of December, accrued wages amounted to Rs.250. Currently, Wages Expense is understated and there is no

liability shown for these wages.

At the end of December, accrued wages amounted to Rs.250. Currently, Wages Expense is understated and there is no

liability shown for these wages.

31 Wages Expense 250

Wages Payable 250

Dec. 31 250Dec. 31 250

Wages PayableBal. 4,275

Wages Expense

Effect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting AdjustmentEffect of Omitting Adjustment

Accrued Accrued Revenues Revenues

(Accrued Assets)(Accrued Assets)

Opportunities In.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities In.Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 220Supplies 2 000Prepaid Insurance 2 400Land 20 000Office Equipment 1 800Accounts Payable 900Unearned Rent 360Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 340Wages Expense 4 275Rent Expense 1 600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42 600 42 600

Opportunities Inc. provided Rs.500 in services during December for which the customer has not been

billed.

Opportunities Inc. provided Rs.500 in services during December for which the customer has not been

billed.

31 Accounts Receivable 500Fees Earned 500

Dec. 31 500Dec. 31 500

Accounts ReceivableBal. 16,340

Fees EarnedBal. 2,220

2,720 16,840

Fixed Fixed AssetsAssets

Land has an infinite life; therefore, it does not depreciate.

A building has a limited life, so it must be depreciated. The contra account used in the adjusting entry is

Accumulated Depreciation—Building

A building has a limited life, so it must be depreciated. The contra account used in the adjusting entry is

Accumulated Depreciation—Building

Because equipment has a limited life, it depreciates. The contra account used is Accumulated Depreciation—Equipment

Accumulated Depreciation—

Office Equipment 50

Dec. 31 50Depreciation Expense

Dec. 31 50

Accumulated Depreciation—Office Equipment

Depreciation Expense 5031

Office equipment Rs.1,800 Less accumulated depreciation 50 Rs.1,750

Book Book valuevalue

Opportunities Inc.’ Adjusted Trial Balance for December 31, 2010

OpportunitiesAdjusted Trial Balance

December 31, 2010

Cash 2 065Accounts Receivable 2 720Supplies 760Prepaid Insurance 2 300Land 20 000Office Equipment 1 800Accumulated Depreciation 50Accounts Payable 900Wages Payable 250Unearned Rent 240Javid Iqbal, Capital 25 000Javid Iqbal, Drawing 4 000Fees Earned 16 840Rent Revenue 120Wages Expense 4 525Rent Expense 1 600Utilities Expense 985

Continued

Opportunities Inc.Trial Balance

December 31, 2010 (Continued)

Supplies Expense 2 040Insurance Expense 100Miscellaneous Expense 455

43 400 43 400

Vertical Vertical Analysis and Analysis and InterpretationInterpretation

Fees earned Rs.187,500 Rs.150,000

Operating expenses:Wages expense 60,000 45,000Rent expense 15,000 12,000Utilities expense 12,500 9,000Supplies expense 2,700 3,000Miscellaneous exp. 2,300 1,800 Total operating expenses 92,500 70,800

Net income 95,000 79,200

Amount Percent Amount Percent

2011 2010

J. Holmes, Attorney-at-LawIncome Statements

For the Years Ended December 31, 2010 and 2010

Fees earned Rs.187,500 100.0%Rs.150,000100.0%

Operating expenses:Wages expense 60,000 45,000Rent expense 15,000 12,000Utilities expense 12,500 9,000Supplies expense 2,700 3,000Miscellaneous exp. 2,300 1,800 Total operating expenses 92,500 70,800

Net income 95,000 79,200

Amount Percent Amount Percent

2011 2010

Fees earned Rs.187,500 100.0%Rs.150,000100.0%

Operating expenses:Wages expense 60,000 $45,000Rent expense 15,000 12,000Utilities expense 12,500 9,000Supplies expense 2,700 3,000Miscellaneous exp. 2,300 1,800 Total operating expenses 92,500 70,800

Net income 95,000 79,200

2011 2010 Amount Percent Amount Percent

32.0%8.0%

Fees earned Rs.187,500 100.0%Rs.150,000100.0%

Operating expenses:Wages expense 60,000 45,000Rent expense 15,000 12,000Utilities expense 12,500 9,000Supplies expense 2,700 3,000Miscellaneous exp. 2,300 1,800 Total operating expenses 92,500 70,800

Net income 95,000 79,200

2011 2010 Amount Percent Amount Percent

32.0%8.0%

Fees earned 187,500 100.0% 150,000100.0%

Operating expenses:Wages expense 60,000 45,000

30.0%Rent expense 15,000 12,000

8.0%Utilities expense 12,500 9,000

6.0%Supplies expense 2,700 3,000

2.0%Miscellaneous exp. 2,300 1,800

1.2% Total operating expenses 92,500 70,800

47.2%Net income 95,000 79,200

52.8%

6.7%1.4%

1.2%

49.3%50.7%

2011 2010 Amount Percent Amount Percent

32.0%8.0%

The End

Chapter 3Chapter 3