ch3 - Chapter 3 The Matching Concept and the Adjusting...

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Chapter 3 The Matching Concept and the Adjusting Process ______________________________________________ OPENING COMMENTS Chapter 3 introduces the adjusting process. The basic idea of the matching concept was presented in Chapter 1, where expenses incurred were matched against revenues. Now in Chapter 3, matching is introduced formally and as a stand-alone concept. The matching concept is defined and discussed, and the chapter includes full coverage of the accrual basis and cash basis of accounting. Of all the accounting concepts and principles introduced in the early chapters of the text, matching is the most important. The chapter introduces two systems of accounting for transactions, 1) cash basis and 2) accrual basis. The main emphasis of this chapter is on accrual basis and therefore preparation of adjusting entries. Definitions, calculations where pertinent, and examples of the four basic types of deferrals and accruals are included. The chapter then covers the adjustment of fixed assets (depreciation). The financial statement analysis concept introduced in Chapter 3 is vertical analysis. Cash basis of accounting In this system expenses are recognized when they are paid for and revenues are recognized when they are received. Accrual basis of accounting In this system expenses are recognized when they incur and not when they are paid for and revenues are recognized when they are earned and not when they are received. How the matching concept relates to the accrual basis of accounting. Now let’s look at the transactions below to demonstrate the difference between cash basis and accrual basis: If rent for May is paid on June 1, in which month will it be reported as an expense under (a) the cash basis and (b) the accrual basis? Answer: (a) June, (b) May. If a university received cash in August for football season tickets, when should this be reported as revenue under (a) the cash basis and (b) the accrual basis? Answer: (a) August, (b) throughout football season as games are played. Please note cash basis of accounting is used by most individuals for income tax purposes, but cannot be used by corporations when reporting their financial statement. The only acceptable method is accrual basis.
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Similar to personal expenses, not all business expenses are paid monthly. If a business wants to know its true expenses for the month, it must consider all expenses incurred, not just the expenses paid that month. Likewise, payment for services provided to customers is not always received in the same month that the service is completed. If a business wants to know how much revenue it has earned, it must determine the value of services provided, not just the cash received in payment for services rendered. The accrual basis of accounting dictates that all revenues be recorded in the accounting records
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This note was uploaded on 06/22/2009 for the course ACCOUNTING 1A taught by Professor Seyedin during the Fall '08 term at Foothill College.

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ch3 - Chapter 3 The Matching Concept and the Adjusting...

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