Matching principle accounting example8/14/2023 For example, if you spend $100 to an oven with the aim of expanding your baking business, and get $122 revenue, you should record the expense and the income in the same accounting period. On the other hand, the matching principle requires you to record the expense of doing business in the same period as the revenue that was generated as a result of incurring the expense. For example, depreciation expenses associated with your business premises and other fixed assets (Also see Accounting – FRS16: Property, Plant, and Equipment) for given period depends on your estimation of how many years you will use the fixed asset. Some of these transactions require you to estimate and adhere to the assumption of periodicity, which allows for a systematic collection of revenues and expenses. However, despite the simplicity of the accounting period assumption, some transactions cannot be assigned to a particular accounting period easily (Also see Cash vs Accrual Accounting Methods). Note that an accounting period that is less than a year is known as an interim period while an accounting period of 12 months is known as the fiscal year. It allows you assign expenses and revenues a particular accounting period of any length. The assumption of accounting allows you – the business owner, to divide your operational business activities into time periods after which you will be compiling accounting information during the bookkeeping exercise for reporting. It is important to note that these two assumptions impact the amount expenses and revenues to be reported. These are the assumptions that you make while measuring your net business income. $100,000 worth of monthly salaries should be matched with $500,000 of revenue generated.The accounting period assumption and matching principle are both assumptions of income measurement. Since $100,000 worth of inventories are to be sold in next period, they should not be subtracted from revenue for the current period.Įxample 3: A hospital pays $20,000 per month to 5 of its doctors. The main point is to subtract only that much expense in a particular period which is related to the revenues earned in that period. The cost of sales should be reflected in the income statement at $900,000. Total purchases of inventories were $1,000,000 of which $100,000 remained on hand at the end of 2010. Recognizing bad debts expense requires considerable estimation.Įxample 2: Company B generates $2,000,000 in revenue in 2010. The possibility of bad debts exists when the sale is made, so expense should be recognized right at that moment when the sale is made. Now, there is a risk that the customers may not pay the amount due against those sales, which results in the company writing off the account receivable as bad debts expense. In accordance with revenue recognition principle, revenue is recognized when the delivery is made. where the customer receives delivery of goods or services but promises to make the payment, say within 30 days. ExamplesĮxample 1: When a company makes sales, majority of it are against credit, i.e. In line with the materiality concept, a company is not required to trace every dollar of expense to every dollar of revenue because the cost of doing so would exceed the potential benefit. Prudence concept, which is a related accounting principle, requires companies not to overstate revenues, understate expenses, overstate assets and/or understate liabilities. In order to apply the matching principle, management of a company is required to apply judgment to estimate the timing and amount of revenues and expenses. It requires recognition of revenues and expenses regardless of the actual receipt of cash from revenues and actual payment of cash for expenses. Matching principle is what differentiates the accrual basis of accounting from cash basis of accounting. If expenses are not properly recorded in the correct period, the net income for a particular period may be either understated or overstated and so are the related balance sheet balances. the net amount earned in a period, is calculated by subtracting expenses from revenues. It is important to match expenses with revenues because net income, i.e. Matching concept is at the heart of accrual basis of accounting. It requires that a company must record expenses in the period in which the related revenues are earned. Matching principle is one of the most fundamental principles in accounting.
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