1. C3 - 1 Learning Objectives Power Notes The Matching Concept and the Adjusting Process The Matching Concept and the Adjusting Process 1. The Matching Concept 2. Nature of the Adjusting Process 3. Recording Adjusting Entries 4. Summary of Adjustment Process 5.Financial Analysis and Interpretation Chapter F3 C3

2. C3 - 2 Reporting Revenue and Expense The Matching Concept Trial Balance, Chart of Accounts Deferrals and Accruals Summary of Adjustments Vertical Analysis Slide #Power Note Topics 3 6 9 20 36 41 Note: To select a topic, type the slide # and press Enter. Chapter F3 The Matching Concept and the Adjusting Process The Matching Concept and the Adjusting Process Power Notes

3. C3 - 3 NetSolutions Unadjusted Trial Balance December 31, 2002 11Cash2,065 12Accounts Receivable2,220 14Supplies2,000 15Prepaid Insurance2,400 17Land20,000 18Office Equipment1,800 21Accounts Payable900 23Unearned Rent360 31Capital Stock25,000 33Dividends4,000 41Fees Earned16,340 51Wages Expense4,275 52Rent Expense1,600 54Utilities Expense985 55Supplies Expense800 59Miscellaneous Expense45542,600

4. C3 - 4 NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1.Assets 11Cash 12Accounts Receivable 14Supplies 15Prepaid Insurance 17Land 18Office Equipment 19Accumulated Depreciation 2.Liabilities 21Accounts Payable 22Wages Payable 23Unearned Rent 3.Stockholders’ Equity 31Capital Stock 32Retained Earnings 33Dividends 4.Revenue 41Fees Earned 42Rent Revenue 5.Expenses 51Wages Expense 52Rent Expense 53Depreciation Expense 54Utilities Expense 55Supplies Expense 56Insurance Expense 59Miscellaneous Expense

5. C3 - 5 TWO METHODS Reporting Revenue and Expense Cash Basis of Accounting Accrual Basis of Accounting

6. C3 - 6 Adjustments – Accrued Expense Wages Payable Wages Expense NetSolutions received employee services for the last two days of December amounting to $250, to be paid later. Adjustment A5 – Record accrued wages of $250. A5..... 250 Bal.....4,275 Expenses Liabilities A5 A5.....250

7. C3 - 7 Adjustments – Accrued Revenue Accounts Receivable Fees Earned As of December 31, NetSolutions provided 25 hours of services at $20 per hour to be billed next month. Adjustment A6 – Record accrued fees earned of $500. A6..... 500 Bal....16,340 Revenues Assets A6 A6.....500 Bal.....2,220

8. C3 - 8 Financial Analysis and Interpretation Objective: Use vertical analysis to compare financial statement items with each other and with industry averages. Comparative Income Statements For the Years Ended December 31, 2003 and 2002 Fees earned$ 187,500100.0%$ 150,000100.0% Operating expenses: Wages expense$ 60,00032.0%$ 45,00030.0% Rent expense15,0008.0 2003 2002 AmountPercent Vertical Analysis: Vertical Analysis: Wages expense $ 60,000 Fees earned $ 187,500 = 32.0%

9. C3 - 9 Cash Basis of Accounting  Revenue reported when cash is received  Expense reported when cash is paid 4 Does not properly match revenues and expenses

10. C3 - 10 Accrual Basis of Accounting 4 Revenue reported when earned 4 Expense reported when incurred 4 Properly matches revenues and expenses in determining net income 4 Requires adjusting entries at end of period 4 It just sounds mean – it really isn’t

11. C3 - 11 The Matching Concept Assets Liabilities Owner’s Equity Debits = Credits Expenses Revenues

12. C3 - 12 The Matching Concept Assets Liabilities Owner’s Equity Debits = Credits Expenses Revenues Net Income

13. C3 - 13 The Matching Concept Assets Liabilities Owner’s Equity Debits = Credits Net income is determined by properly matching expenses and revenues. Expenses Revenues Net Income matching

14. C3 - 14 NetSolutions Unadjusted Trial Balance December 31, 2002 11Cash2,065 12Accounts Receivable2,220 14Supplies2,000 15Prepaid Insurance2,400 17Land20,000 18Office Equipment1,800 Assets

15. C3 - 15 NetSolutions Unadjusted Trial Balance December 31, 2002 11Cash2,065 12Accounts Receivable2,220 14Supplies2,000 15Prepaid Insurance2,400 17Land20,000 18Office Equipment1,800 21Accounts Payable900 23Unearned Rent360 Liabilities

16. C3 - 16 NetSolutions Unadjusted Trial Balance December 31, 2002 11Cash2,065 12Accounts Receivable2,220 14Supplies2,000 15Prepaid Insurance2,400 17Land20,000 18Office Equipment1,800 21Accounts Payable900 23Unearned Rent360 31Capital Stock25,000 33Dividends4,000 Stockholders’Equity

17. C3 - 17 NetSolutions Unadjusted Trial Balance December 31, 2002 11Cash2,065 12Accounts Receivable2,220 14Supplies2,000 15Prepaid Insurance2,400 17Land20,000 18Office Equipment1,800 21Accounts Payable900 23Unearned Rent360 31Capital Stock25,000 33Dividends4,000 41Fees Earned16,340 Revenue

18. C3 - 18 NetSolutions Unadjusted Trial Balance December 31, 2002 11Cash2,065 12Accounts Receivable2,220 14Supplies2,000 15Prepaid Insurance2,400 17Land20,000 18Office Equipment1,800 21Accounts Payable900 23Unearned Rent360 31Pat King, Capital25,000 32Pat King, Drawing4,000 41Fees Earned16,340 51Wages Expense4,275 52Rent Expense1,600 54Utilities Expense985 55Supplies Expense800 59Miscellaneous Expense455 42,600 Expenses

19. C3 - 19 NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1.Assets 11Cash 12Accounts Receivable 14Supplies 15Prepaid Insurance 17Land 18Office Equipment 19Accumulated Depreciation 2.Liabilities 21Accounts Payable 22Wages Payable 23Unearned Rent 3.Stockholders’ Equity 31Capital Stock 32Retained Earnings 33Dividends 4.Revenue 41Fees Earned 42Rent Revenue 5.Expenses 51Wages Expense 52Rent Expense 53Depreciation Expense 54Utilities Expense 55Supplies Expense 56Insurance Expense 59Miscellaneous Expense

20. C3 - 20 NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1.Assets 11Cash 12Accounts Receivable 14Supplies 15Prepaid Insurance 17Land 18Office Equipment 19Accumulated Depreciation 2.Liabilities 21Accounts Payable 22Wages Payable 23Unearned Rent 3.Stockholders’ Equity 31Capital Stock 32Retained Earnings 33Dividends 4.Revenue 41Fees Earned 42Rent Revenue 5.Expenses 51Wages Expense 52Rent Expense 53Depreciation Expense 54Utilities Expense 55Supplies Expense 56Insurance Expense 59Miscellaneous Expense

21. C3 - 21 NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1.Assets 11Cash 12Accounts Receivable 14Supplies 15Prepaid Insurance 17Land 18Office Equipment 19Accumulated Depreciation 2.Liabilities 21Accounts Payable 22Wages Payable 23Unearned Rent 3.Stockholders’ Equity 31Capital Stock 32Retained Earnings 33Dividends 4.Revenue 41Fees Earned 42Rent Revenue 5.Expenses 51Wages Expense 52Rent Expense 53Depreciation Expense 54Utilities Expense 55Supplies Expense 56Insurance Expense 59Miscellaneous Expense

22. C3 - 22 NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement 1.Assets 11Cash 12Accounts Receivable 14Supplies 15Prepaid Insurance 17Land 18Office Equipment 19Accumulated Depreciation 2.Liabilities 21Accounts Payable 22Wages Payable 23Unearned Rent 3.Stockholders’ Equity 31Capital Stock 32Retained Earnings 33Dividends 4.Revenue 41Fees Earned 42Rent Revenue 5.Expenses 51Wages Expense 52Rent Expense 53Depreciation Expense 54Utilities Expense 55Supplies Expense 56Insurance Expense 59Miscellaneous Expense

23. C3 - 23 Adjustments – Deferrals and Accruals Current Period Future Period Cash Received Revenue Recorded Deferrals Cash Received Revenues

24. C3 - 24 Adjustments – Deferrals and Accruals Current Period Future Period Cash Received Revenue Recorded Deferrals Cash Received Accruals Revenue Recorded Cash Received Revenues

25. C3 - 25 Adjustments – Deferrals and Accruals Current Period Future Period Cash Received Revenue Recorded Deferrals Cash Received Current Period Future Period Cash Paid Expense Recorded Expenses Cash Paid Accruals Revenue Recorded Cash Received Revenues Deferrals

26. C3 - 26 Adjustments – Deferrals and Accruals Current Period Future Period Cash Received Revenue Recorded Deferrals Cash Received Current Period Future Period Expense Recorded Cash Paid Expense Recorded Expenses Cash Paid Accruals Revenue Recorded Cash Received Revenues Deferrals Accruals

27. C3 - 27 Adjustments – Deferred Expense P1..... 2,400 Cash Prepaid Insurance Insurance Expense P1..... 2,400 On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Adjustment A1 – Record insurance used for December, $100. Expenses Assets Example P1 – Purchase initially recorded as an asset.

28. C3 - 28 Adjustments – Deferred Expense P1..... 2,400 Cash Prepaid Insurance Insurance Expense P1..... 2,400 On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Adjustment A1 – Record insurance used for December, $100. A1..... 100 Expenses Assets A1 Example P1 – Purchase initially recorded as an asset. A1

29. C3 - 29 Adjustments – Deferred Expense P2..... 2,400 Cash Prepaid Insurance Insurance Expense P2..... 2,400 On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Adjustment A2 – Record insurance unused as of December 31. Expenses Assets Example P2 – Purchase initially recorded as an expense.

30. C3 - 30 Adjustments – Deferred Expense P2..... 2,400 Cash Prepaid Insurance Insurance Expense P2..... 2,400 On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400. Adjustment A2 – Record insurance unused as of December 31. A2..... 2,300 Expenses Assets A2 Example P2 – Purchase initially recorded as an expense. A2

31. C3 - 31 Adjustments – Deferred Revenue Cash Unearned Rent Rent Revenue S1..... 360 On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Adjustment A3 – Record rent earned for December. S1..... 360 Revenues Liabilities Example S1 – Sale initially recorded as a liability.

32. C3 - 32 Adjustments – Deferred Revenue A3..... 120 Cash Unearned Rent Rent Revenue S1..... 360 On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Adjustment A3 – Record rent earned for December. S1..... 360 A3.....120 Revenues Liabilities A3 Example S1 – Sale initially recorded as a liability. A3

33. C3 - 33 Adjustments – Deferred Revenue Cash Unearned Rent Rent Revenue S2..... 360 On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Adjustment A4 – Record rent unearned as of December 31. S2.....360Revenues Liabilities Example S2 – Sale initially recorded as revenue.

34. C3 - 34 Adjustments – Deferred Revenue A4..... 240 Cash Unearned Rent Rent Revenue S2..... 360 On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1. Adjustment A4 – Record rent unearned as of December 31. A4..... 240 S2.....360Revenues Liabilities A4 Example S2 – Sale initially recorded as revenue. A4

35. C3 - 35 Adjustments – Accrued Expense Wages Payable Wages Expense NetSolutions received employee services for the last two days of December amounting to $250, to be paid later. Adjustment A5 – Record accrued wages of $250. Bal.....4,275 Expenses Liabilities

36. C3 - 36 Adjustments – Accrued Revenue Accounts Receivable Fees Earned As of December 31, NetSolutions provided 25 hours of services at $20 per hour to be billed next month. Adjustment A6 – Record accrued fees earned of $500. Bal....16,340 Revenues Assets Bal.....2,220

37. C3 - 37 Summary of Adjustments Deferred Expenses Assets A1A2 Buying Side Rearranging the Debits

38. C3 - 38 Summary of Adjustments Deferred Expenses Assets A1A2 Deferred Revenues Liabilities A3A4 Buying Side Selling Side Rearranging the Debits Rearranging the Credits

39. C3 - 39 Summary of Adjustments Expenses Liabilities A5 Accrued Expenses Buying Side Selling Side Adding a New Transaction

40. C3 - 40 Summary of Adjustments Expenses Liabilities A5 Revenues Assets A6 Accrued Expenses Buying Side Selling Side Adding a New Transaction Adding a New Transaction Accrued Revenues

41. C3 - 41 Summary of Adjustments Deferred Expenses Assets A1A2 Expenses Liabilities A5 Deferred Revenues Liabilities A3A4 Revenues Assets A6 Accrued Expenses Buying Side Selling Side Rearranging the Debits Adding a New Transaction Rearranging the Credits Adding a New Transaction Accrued Revenues

42. C3 - 42 Note: To see the topic slide, type 2 and press Enter. Power Notes Chapter F3 The Matching Concept and the Adjusting Process The Matching Concept and the Adjusting Process This is the last slide in Chapter F3.