Chapter 3 Matching Concept & Adjusting Process -...

Chapter 3 Matching Concept & Adjusting Process
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Chapter 3 The Matching Concept and the Adjusting Process ______________________________________________ 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. Of all the accounting concepts and principles introduced in the early chapters of the text, matching is the most important. After studying the chapter, you should be able to: 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. KEY TERMS: Accounting Period Concept Cash Basis Accrual Basis Matching Concept Adjusting Process Revenue Recognition Concept Question: 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. Question: 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. The cash basis of accounting is used by most individuals for income tax purposes. Matching Concept: 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 when they are earned, instead of when the cash payment is received from customers. All expenses are to be recorded in the accounting records when they are incurred, not when they are 63
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paid. Finally, if a business wants to determine whether the pricing of its services results in an adequate profit, it must compare the revenues earned from providing services to all the expenses incurred in providing those services. The matching concept in accounting states that all the expenses incurred in providing a service or selling a product must be recorded in the same period that the revenue from the service or sale is recorded. Expenses are matched against the revenue they generate. The matching concept and accrual basis of accounting go hand in hand. Because of these
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