The matching principle is a basic concept in accrual accounting. It tells an entity to report an expense in the same period in which they recognize revenue. Its application is commonly associated with a company’s financial statements. But what is the matching principle? Let’s find out. This principle is used in both accounting systems to determine the proper way to record expense and revenue. Hence, a company should follow it in all of its business dealings.
Under the matching principle, the cost of a product is equal to its revenue. Using this principle, a business would record revenue of ninety thousand dollars in the first year of the assets’ life. As a result, the costs of production would match the revenue recognized in the year of its creation. For example, if a salesperson earned a commission from a sale, they would invoice the customers in December. With this method, cost recognition would be equally distributed over time, avoiding depreciation and ensuring accurate reporting of operating results.
The matching principle can also help improve the consistency of a company’s financial statements. For example, an independent distributor earns a 10% commission for selling products in November, but is paid for the product in December. This month, the distributor would record a $900 expense on the November statement in order to reflect the full amount of commissions he earned in November. In the following month, he would reverse the same expense on the December statement, thus complying with the matching principle.
The matching principle is a core concept of accrual accounting. This principle instructs companies to recognize revenue and expenses at the same time. However, it is difficult to apply this principle in all circumstances, since many expenses cannot be recognized until they have been paid. As such, investors should look at the Cash Flow Statement. When choosing an accounting method, it’s important to understand the matching principle as much as possible. And be sure to look for systems that segment customers and report revenue.
Another example of the matching principle is in the area of rent. Typically, rent is an expense that doesn’t vary with the amount of revenue a company earns. As such, it should be evenly spread over the rental period. Its costs are related to the expected future benefit, but there is no direct relationship between the two. In a nutshell, rent expense should be recognized as an expense. The same principle applies to expenses when they have no future benefit, such as the production of faulty goods, research and general expenses.
Another basic principle of accrual accounting is the matching principle. It requires that expenses be recognised in the same period as revenues. This ensures that the full effect of the transaction is reflected in the financial statements. In addition, the matching principle has a connection to the going concern assumption. So, when should an organization recognise expenses? The matching principle is critical to the accuracy of financial statements. The concept is crucial for every business. It helps in ensuring that the matching principle is applied in all business transactions.