matching principle

(noun)

According to the principle, expenses are recognized when obligations are (1) incurred (usually when goods are transferred or services rendered, e.g. sold), and (2) offset against recognized revenues, which were generated from those expenses, no matter when cash is paid out. In cash accounting—in contrast—expenses are recognized when cash is paid out.

Related Terms

Examples of matching principle in the following topics:

  • 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

  • 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.

  • Limitations of the Income Statement

    • This could be due to the matching principle, which is the accounting principle that requires expenses to be matched to revenues and reported at the same time.

  • Noncash Items

    • On a more detailed level, depreciation refers to two very different but related concepts: the decrease in the value of tangible assets (fair value depreciation) and the allocation of the cost of tangible assets to periods in which they are used (depreciation with the matching principle).

  • 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).

  • 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.

  • Other Expenses

    • The allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle).

  • Long-Term Approach

    • This inconsistency does not follow the matching principle, which states that short-term cash needs should be financed with short-term debt and long-term cash needs should be financed with long-term sources of funds.

  • Discrepancies

    • A discrepancy is an accounting error that was not caused intentionally, meaning the books don't properly match.
    • A discrepancy just means something doesn't match.
    • Reconciliation is used to ensure that the money leaving an account matches the actual money spent, this is done by making sure the balances match at the end of a particular accounting period.

  • Role of Financial Markets in Capital Allocation

    • One of the main functions of financial markets is to allocate capital, matching those who have capital to those who need it.
    • Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.