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
After studying the chapter, you should be able to:
Explain how the matching concept relates to the accrual basis of accounting.
Explain why adjustments are necessary and list the characteristics of adjusting entries.
Journalize entries for accounts requiring adjustment.
Summarize the adjustment process and prepare an adjusted trial balance.
Use vertical analysis to compare financial statement items with each other and with industry
Accounting Period Concept
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?
(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.
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
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