Chapter 3
The Matching Concept and
The Adjusting Process
Objectives
Explain how the matching concept relates to the
Explain accrual basis of accounting
Explain why adjustments are necessary and list
Explain the characteristics of adjusting entries
Journalise entries for accounts requiring
Journalise adjustment
Content
• Time difference!
• Cash Basis and Accrual Basis
• Matching concept
• Adjusting process
Time difference
Remember “accounting period concept”?
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 sold goods to customer
on credit on 1st May. The customer paid the debt
on 4th June.
Accrual Basis
• Revenues/Expenses are reported in the
profit and loss statement in the period in
which they are earned/incurred. phát sinh
Matching Concept
• Accounting concept that supports reporting
revenues and related expenses in the same
period is called the Matching Concept, or
Matching Principle
revenue
related expenses
in same period
-> adjusting process
Adjusting Process
• Ensure that the revenue recognition and
expense recognition principles are
followed.
• Necessary because the trial balance may
not contain up-to-date and complete data.
• Required every time a company prepares
financial statements.
• Will include one income statement account
and one balance sheet account.
make sure recorded all revenues and expenses
Deferrals
• Cash received or paid in the
Difference current period, but these items
relates to future period
between
trả trước tiền thuê nhà 24 month
prepaid expense
cuối tháng ghi nhận chi phi
Deferrals Accruals
and
Accruals • Cash will not be received or paid
until a future period, the revenue
and expense relates to the
current period lương tháng 6 tháng 7 mới trả
vay ngân hàng khi đáo hạn hợp đồng vay or vay mỗi tháng
ghi nhận chi phí hàng tháng
Current Accounting Period Future Accounting Period
trả tiền cho người ta
Prepaid expenses người ta trả trước tiền cho mình
Unearned revenues Revenue Earned
Deferrals or Expense
Cash Received or Incurred
Paid
Accrued revenues consulting services rồi 5 -> 20 mới thu tiền
Accrued expenses 5/7 -31/7 -> 15/15 questions
5/7 -2/8 -> mới thu tiền 15$ performed services Cash Received or
rồi mà khách hàng chưa trả tiền accured revenues
Accruals Revenue Earned Paid
or Expense
Incurred
Deferred Expenses
(Prepaid expenses)
chi phí trả trước
supplies expenses
bảo hiểm expenses
trả trước tiền thuê nhà
• Initially recorded as assets but are expected to
become expenses.
• Supplies and Supplies Expense asset
• Prepaid Insurance and Insurance Expense asset
• Prepaid rent and rental expense
Prepaid Expenses
◆ Expire either with the passage of time or through use.
◆ Adjusting entry:
► Increase (debit) to an expense account and insurance expense
► Decrease (credit) to an asset account. prepaid insurance
quên bút toán
quên entry asset ---- overstate -> asset bị overstate
----- understate
expense ---- overstate
----- understate -> expense bị understate
câu hỏi cấp độ khó
Illustration 3-4
Adjusting entries for prepaid
expenses
Prepaid Expenses
Illustration: Pioneer Advertising Inc. Inc.
purchased supplies costing $2,500 on Supplies: 1000 units x 5000
5/7: 100 units x 5000= 500.000
October 5. Pioneer recorded the Dr Supplies Expense 500.000
Cr. Supplies 500.000
purchase by increasing (debiting) the On hand: 200 units -> used: 800 units
-> adjusting entry
asset Supplies. This account shows a 5th Oc Dr Supplies 2500
Cr Cash 25000
Adjusting entry
balance of $2,500 in the October 31 trial 31st OC Dr Supplies expense 1500
Cr Supplies 1500
balance. An inventory count at the close -> supplies còn 1000
of business on October 31 reveals that
$1,000 of supplies are still on hand.
Oct. 31 Supplies Expense 1,500
Supplies 1,500
Prepaid Expenses
4th OC
On October 4, Pioneer Advertising Inc. paid Dr Prepaid Insurance 600 (asset)
Cr Cash 600
31st Oc
50 month $600 for a one-year fire insurance policy. Dr Insurance expense 50
Cr Prepaid insurance 50
Coverage began on October 1. Pioneer Prepaid insurance
-------------
600 | 50
-----------
recorded the payment by increasing (debiting) 550
-> 31st October: Normal Balance 450$
Prepaid Insurance. This account shows a -> câu hỏi trắc nghiệm tương tự
Prepaid insurance
balance of $600 in the October 31 trial -------------------------
600|
150
balance. Insurance of $50 ($600 ÷ 12) ___________
450
expires each month.
Oct. 31 Insurance Expense 50
Prepaid Insurance 50
Prepaid Expenses
tài sản bị hao mòn để generate income
Depreciation
◆ Buildings, equipment, and motor vehicles (assets that
provide service for many years) are recorded as assets, cách ghi nhận depreciation
Minh góp xe truck
rather than an expense, on the date acquired. Dr PPE 100mil
Cr Capital 100 mil
Air conditioner
Dr PPE 20mil
◆ Depreciation is the process of allocating the cost of Cr Cash 20 mil
-> Asset bị hao mòn từ từ
an asset to expense over its useful life. Dr depreciation expense (dep exp) 5 mil
Cr accumulated depreciation 5mil
(hoa mòn lũy kế)
(contra asset account)
◆ Depreciation does not attempt to report the actual ngược vs asset: Dr: de Cr: in
-> k ghi giảm PPE trừ khi bán đi
change in the value of the asset. 120-5=115 -> vẫn còn tiếp tục sử dụng
Prepaid Expenses
For Pioneer Advertising, assume that
depreciation on the equipment is $480 a year,
or $40 per month.
Oct. 31
Depreciation Expense 40
Accumulated Depreciation 40
Accumulated Depreciation is called
a contra asset account.
Helpful Hint
All contra accounts have increases,
decreases, and normal balances opposite
to the account to which they relate.
Prepaid Expenses
Statement Presentation
◆ Accumulated Depreciation is a contra asset account
(credit).
◆ Appears just after the account it offsets (Equipment) on
the balance sheet.
book value = cost of asset - accumulated depreciation
◆ Book value is the difference between the cost of any (giá trị sổ sách/còn lại) (nguyên giá tài sản)
depreciable asset and its accumulated depreciation.
Illustration 3-8
Nếu giá trị book value thấp
-> PPE đã cũ rồi
book value
Prior to adjustment,
assets are overstated
and expenses are
understated
đặt cọc k phải unearned revenues
tập gym/ mua gói services (mua chỗ lớn)
Deferred Revenue/
Unearned Revenues
• Initial recorded as liabilities but are expected to
become revenues.
◆ Rent ◆ Magazine subscriptions
gym -> revenue 2 years: unearned revenue revenue 500/month
◆ Airline tickets
Unearned Rent and Rent
Revenue
• Let assume I have a house to rent out for students @
$100 per month.
• What if you guys sign a 6-months rent contract with
me at 1st December? (Paid in full)
1st Dec Dr Cash 100x6 Unearned revenue
Cr Unearned Revenue 100x 6 --------------------------
100 | 600
-> k phải revenue đợi đến 31st Dec mới ghi doanh thu tháng đầu tiên -------------------
500
31st De Dr Unearned Revue 100
Cr Service Revenue 100 31st March: Normal Balance 200
-> 31st May -> trắc nghiệm tương tự
unearned revenue: liability
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.
• Salaries owned to employees, interest
$10,000 interest rate 10%
interest rate per month
10,000 x 10%x12= 83, 33
Salaries Payable and
Salaries Expense
• You are hired as sale assistants in [Link]’s food
store on 1st March 1st March: no entry
31st March: Dr salary expense: 3 mil
Cr Cash: 3 mil
(Case 1)
• Salaries: 3 mil per month
• How [Link] record this at the beginning and the end
of March? Knowing that [Link] has paid the amount
of the salaries at the end of March
Case 2: 31st March: (Pay in April) Dr Salaries expense: 3 mil
Cr salaries Payable 3 mil
Interest Payable
and Interest
Expense
1st October Dr Cash 5,000
Cr Loans 5,000
5,000x12/12= 50 per month
31st October Dr Interest exp $50%
Cr Interest payable $50%
Accrued Revenue
• Are revenues that have been earned but have not
been recorded in the accounts.
• Ex: Lawyer has provided services to a client but has
not send an invoice till the end of the month
• Account Receivable and Sales
12nd July: $1/question
31st July: 15$
-> adjusting entries
1st Aug: (recorded revenue)
Account Receivable and
Revenue
• I signed an agreement with students on January
15th . Binding by the agreement, I 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 I
had answered 20 questions at the end of
Dr AR: 15x10=150
January. Cr Revenue 150
• How do I record this at the end of the month?
Summary of Adjusting Process
Dr
Cr
• Deferred Expense chi phi tra truoc
Dr
• Deferred Revenue Cr
Dr
• Accrued Expense Cr
Dr
• Accrued Revenue Cr
• Depreciation Dr
Cr
Exercise 1
You have the following information for ACB company in January 20X0:
1st Owner contribute capital 100,000 in cash, also sign a 6-months rental contract for the office
($200 per month and pay full in advance).
1st Borrow 5,000 cash from bank. The annual interest rate is 10%
3rd Purchase goods at cost of 3,000 on credit.
5th Purchase car at cost of 20,000 by cash (Depreciation is estimated $500 per month)
6th Sell all of the above goods $4,500 and receive cash
11th Pay for the goods which are bought on 3rd by cash
15th Sign a contract to customer for lease a house from 15th January to 15th June. The lease is
$500/month. The customer will pay money in the beginning of the month.
20th Deposit 5,000 cash to open-up a bank account
Requirement: Record the transactions in January and prepare Trial Balance for the month
Exercise 2
1st Invest 20,000 in cash to the company’s capital
1st Sign a 6-months rental contract for the office (@4,000 per month and pay full in advance)
3rd Purchase goods at cost of 10,000 on credit
5th Purchase machine at cost of 10,000 on credit (Depreciation is estimated @$50 per
month)
6th Sell goods @4,500 and receive cash (the amount of good originally costs 3,100)
11th Pay for the machine by cash (@6,000)
17th Invest more 8,000 in cash to the business
20th Deposit 5,000 cash to open-up a bank account
26th Purchase goods at cost of 10,000 on credit
31st Sell goods (which originally cost 7,000) @9,000 on credit.
Exercise 3
1st Hire an accountant @800 per month, salary is paid at the end of each month.
2nd Invest more 4,000 cash into the business.
5th Purchase goods at cost of 6,000 on credit.
12th Make a payment of 6,000 cash to supplier of goods.
18th Sell goods (which originally cost 5,000) @8,000 in cash.
20th Borrow 3,000 cash from bank.
25th Sell goods (which originally cost 4,000) @6,000 and 50% of this is received in cash
(the rest is on credit).
28th Pay salary for accountant.