2. The Accounting Process Source Document Journals Transaction Ledger Trial Balance Balance Day Adjustments Final Reports Reversing Entries Profit and Loss Summary
3. Matching Principle The Accounting Period Assumption divides the life of an enterprise into arbitrary time periods. Accountants accept that the life of a business is indefinite. For this reason it is necessary to divide the business’s life into periods at the end of which earning capacity and financial stability can be determined. The Matching Principle is a concept inherent in the Accounting Period Assumption.
4. Matching Principle The matching principle states that revenues earned in the period should be matched to expenses incurred. This allows the determination of profit for the period. Given that, during the period, this does not occur neatly (eg revenue earned may not be received until the next period) it is necessary to adjust these revenue and expense accounts.
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11. 3. Unearned Revenue You try: The business leases out part of its building for $25 200 per annum. The tenant pays quarterly in advance. The last payment was received on 1 May 2007. Rent Revenue Dr 2 100 Unearned Revenue Cr 2 100 Commission of 5% was paid in advance on anticipated sales of $40 000. Commission Revenue Dr 2 000 Unearned Revenue Cr 2 000
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13. 4. Accrued Revenue You try: In February 2007, the business successfully sued Ajax Co for $160 000. The court ordered payment be made by 31 May 2007. To date, two-thirds of the amount has been received. Under the court order, any amounts not paid by this date will accrue interest at the rate of 5% per annum. Accrued Revenue Dr 53 555 Income from law suit Cr 53 333 Interest revenue Cr 222 The business has $45 000 invested in a bank account that pays monthly interest at 3% per annum. As at 30 June, interest for June had not been received. Accrued Revenue Dr 113 Interest Revenue Cr 113