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Introduction to Accounting
Preparing for a User’s Perspective
Deferred Expenses:
Cash is paid BEFORE the expense is recognized
By Kevin C. Kimball, CPA
with support from
Debits and Credits Trainer
www.canvas.net
Free Jan. 2014
Available on the
Google Play Store
Rent
Revenues
Sales
Revenues
Interest
Income
Consulting
Revenues
Cost of Goods Sold
Salary Expense
Wages Expense
Travel Expense
Utilities Expense
Advertising Expense
Interest
Expense
Insurance
Premiums
Maintenance Fees
Depreciation Expense
Claims incurred
Meals & Entertainment Expense
Cash Out = Pay off Liabilities
Cash Out = Create Assets
Matching Principle
Recognize expenses in the same accounting period
as the revenues that they helped generate.
Three Common Matching Principle Situations
12/31/X1
and the expense is recognized.
3) Cash is paid AFTER the
benefit is received
and the expense is recognized.
12/31/X3
Easy NO
adjustments
needed.
1) Cash is paid at the SAME
time as the benefit received.
2) Cash is paid BEFORE the
benefit is received
12/31/X2
Deferred
expenses
Yes,
adjustments
needed.
Yes,
adjustments
needed.
Accrued
expenses
Matching principle: AMOUNT $ and TIMING of EXPENSES
2) Cash is paid BEFORE the expense is recognized
Example: On 11/1/X1 Renter Co. paid $18,000 cash to Landlord Co. for the following
18 month rental period to end on 4/30/X3. Record all required entries AND adjusting
entries for Renter Co. from 20X1-20X3 as per the matching principle.
FTYE 12/31/X1
FTYE 12/31/X2
FTYE 12/31/X3
4/30 Per the
matching
principle
$18,000 for 18 months = $1,000 per month
WHEN should
11
the rent
1 11 1 1 1 1 1 1 1 1 1
4 months expense be
12 months
2 months
1111
= $4,000 recognized?
= $12,000
= $2,000
Prepaid Rent
Expense
11/1
2) Cash is paid BEFORE the expense is recognized
FTYE 12/31/X1
FTYE 12/31/X2
FTYE 12/31/X3
11/1/X1
Prep. Rent Expense $18,000
Cash
$18,000
12/31/X1
Rent Expense
$2,000
12/31/X2
12/31/X3
Rent Expense $12,000
Rent Expense $4,000
Prep. Rent Expense $2,000
Prep. Rent Expense $12,000
Prepaid Rent Expense
11/1/X1
18,000
12/31/X1
16,000
12/31/X2
12/31/X3
2,000
12/31/X1
12,000
12/31/X2
4,000
12/31/X3
4,000
0
Prep. Rent Expense $4,000
2) Cash is paid BEFORE the expense is recognized
FTYE 12/31/X1
Rent Expense
FTYE 12/31/X2
$2,000
Rent Expense
$12,000
FTYE 12/31/X3
Rent Expense
4/30
11/1
$18,000 for 18 months = $1,000 per month
2 months
= $2,000
12 months
= $12,000
4 months
= $4,000
Do our recognized expenses comply with the matching principle?
$4,000
2) Cash is paid BEFORE the expense is recognized
Example: On 12/14/X1 House Co. paid $200 to Roofer Co. to REPAIR his old roof in Feb. X2. On
2/8/X2, Roofer Co. repaired the roof by patching it. Record all required entries AND adjusting
entries for House Co. from 20X1-20X2 as per the matching principle.
FTYE 12/31/X1
12/14
Cash Paid BUT
NO Expenses Recognized
FTYE 12/31/X2
2/8
$200 of
Expenses Recognized
Per the matching principle
WHEN should House Co. recognize the expense?
What if House Co. paid $30,000 for a new 30 year roof?
2) Cash is paid BEFORE the expense is recognized
FTYE 12/31/X1
FTYE 12/31/X2
2/8/X2
12/14/X1
Maintenance Exp. $200
Prep. Maintenance Exp. $200
Cash
Prep. Maintenance Exp. $200
$200
12/31/X1
No adjusting entry needed.
Prepaid Maintenance Expense
12/14/X1
12/31/X1
200
200
200
12/31/X2
0
2/8/X2
2) Cash is paid BEFORE the expense is recognized
FTYE 12/31/X1
No expenses
FTYE 12/31/X2
Maintenance Expense $200
12/14
Cash Paid BUT
NO Expenses Recognized
2/8
$200 of Maintenance
Expense Recognized
Expense recognition key points
1) Only recognize expenses in the accounting period in which the benefit is
received, which should match the related revenue.
2) If you acquire something that will provide future value, it will be an asset (often a
prepaid) until the benefit is received and the asset is expensed.
3) At year end, review all asset account balances
to determine if they still have value, if not,
record an adjusting entry to expense them.
4) At year end, review your expense account
balances to ensure no future value exists, if
future value exists they may need adjusting.
Balance Sheet
Assets:
Liabilities:
Unearned Revenue
Equity
Income Statement
Revenues
Expenses
Net Income
Introduction to Accounting
Preparing for a User’s Perspective
Deferred Expenses:
Cash is paid BEFORE the expense is recognized
By Kevin C. Kimball, CPA
with support from
Debits and Credits Trainer
www.canvas.net
Free Jan. 2014
Available on the
Google Play Store