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