matching principle

Examples of matching principle in the following topics:

• Current Guidelines for Expense Recognition

  • For an expense to be recognized under the matching principle, it must be both incurred and offset against recognized revenues.
  • Since most businesses operate using accrual basis accounting, expense recognition is guided by the matching principle.
  • Under the matching principle, the expense related to the raw material is not incurred until delivery.
  • The matching principle assumes that every expense is directly tied to a revenue generating event, such as a production of a good or service.
  • Explain how accrual accounting uses the matching principle for expense recognition

• Current Guidelines for Revenue Recognition

  • The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle.
  • The matching principle's main goal is to match revenues and expenses in the correct accounting period.
  • The principle allows a better evaluation of the income statement, which shows the revenues and expenses for an accounting period or how much was spent to earn the period's revenue.
  • By following the matching principle, businesses reduce confusion from a mismatch in timing between when costs (expenses) are incurred and when revenue is recognized and realized.
  • Explain how the revenue recognition principle affects how a transaction is recorded

• Importance of Recognition and Measurement

  • In accounting, recognition of revenues and expenses is based on the matching principle.
  • The revenue recognition principle and the matching principle are two cornerstones of accrual accounting.
  • According to the matching principle in accrual accounting, expenses are recognized when obligations are incurred—regardless of when cash is paid out.
  • The matching principle is a culmination of accrual accounting and the revenue recognition principle.
  • The matching principle allows better evaluation of actual profitability and performance.

• Differences Between Accrued and Deferred Expenses

  • Accrued and deferred expenses represent the two possibilities that can occur due to timing differences under the matching principle.
  • Accrued expenses and deferred expenses are two examples of mismatches between when expenses are recognized under the matching principle and when those expenses are actually paid.

• Depreciation

  • Depreciation refers to two very different but related concepts: the decrease in value of assets (fair value depreciation), and the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle).
  • Where the assets produce benefit in future periods, the matching principle of accrual accounting dictates that those costs must be deferred rather than treated as a current expense.
  • Describe the relationship between allocation of cost and the matching principle when calculating depreciation

• What Is Depreciation?

  • Depreciation for accounting purposes refers the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching of revenues to expenses principle).
  • The reason for the expense is to comply with the matching principle required by accrual accounting.
  • According to the principle, expenses are recognized regardless of cash payment when obligations are:

• Effects of GAAP on the Income Statement

  • These differences are due to the recording requirements of GAAP for financial accounting (usually following the matching principle and allowing for accruals of revenue and expenses) and the requirements of the IRS's tax regulations for tax accounting (which are more oriented to cash).
  • To achieve basic objectives and implement fundamental qualities, GAAP has four basic principles:
  • The revenue recognition principle.
  • The matching principle.
  • The full disclosure principle.

• Revenue

  • Expenses should be matched with revenue.
  • This means that you can pay for an expense months before it is actually recorded, as the expense is matched to the period the revenue is made.
  • Accounting principles provide guidance and rules on when to recognize revenue and expenses.

• Introduction to GAAP

  • Monetary Unit Principle: assumes a stable currency is going to be the unit of record.
  • This is also know at the stable dollar principle.
  • Matching Principle: Expenses have to be matched with revenues as long as it is reasonable to do so.
  • Please note: Historical cost and the matching principle are slowly disappearing, having been replaced by FASB No. 157 which requires companies to classify assets based on fair value.
  • Consistency principle: the company uses the same accounting principles and methods from year to year.

• Reporting of Financial Statement Analysis

  • In the US, companies must conform to GAAP, or generally accepted accounting principles.
  • These principles are set forward by the FASB, or the Financial Accounting Standards Board.
  • Monetary Unit principle: assumes a stable currency is going to be the unit of record.
  • Matching principle: implies that expenses have to be matched with revenues as long as it is reasonable to do so.
  • Consistency principle: the company uses the same accounting principles and methods from period to period.