The Matching Principle in Accounting What You Need to Know

You should only deduct the amount of expenses in a period that correspond to the revenue earned during that period. In light of the fact that $100,000 worth of inventory will be sold next period, they shouldn’t be deducted from revenue for the current period. – Angle Machining, Inc. buys a new piece of equipment for $100,000 in 2015.

If an expense is not directly tied to revenues, the expense should be reported on the income statement in the accounting period in which it expires or is used up. If the future benefit of a cost cannot be determined, it should be charged to expense immediately. There can be inherent misrepresentation and misreporting if the expenses are recognized for the wrong accounting periods. matching priciple It will result in inaccurate reporting and can also be deliberately used to manipulate books of accounts, making the whole accounting process unreliable. The expenses correlated with revenues should be recognized in the same period in the financial statements. This concept tries to ensure that there are no over or under revenue or expenses records in the financial statements.

Understanding How Matching Principle Works

My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. The following example represents the matching principle for the Cost of Goods Sold (COGS). There are many drawbacks to the matching notion, one of which is that estimation cannot be used. However, the principal’s benefits exceed these drawbacks, which may be overcome with a little bit of common sense. Consider a corporation that decides to establish a new office headquarters to increase worker productivity.

The matching principle requires expenses to be recognized in the period in which the related revenues are earned. Accrued expenses are recognized when incurred, regardless of payment timing. This ensures expenses are matched with revenues generated, providing accurate financial reporting. Period costs, such as office salaries or selling expenses, are immediately recognized as expenses (and offset against https://www.bookstime.com/ revenues of the accounting period). Unpaid period costs are accrued expenses (liabilities) to avoid such costs (as expenses fictitiously incurred) to offset period revenues that would result in a fictitious profit. An example is a commission earned at the moment of sale (or delivery) by a sales representative who is compensated at the end of the following week, in the next accounting period.

Record To Report

Financial statements help keep track of your business’s financial activity, so you can see exactly how you’re doing. Download our FREE whitepaper, Use Financial Statements to Assess the Health of Your Business, to learn more. Let’s  assume that in 2015, Company ABC generated $2,000,000 in revenue. Expense 4 began in May and was incurred partially in May and partially in June. Expense 5 began in June and all of this expense was incurred in June.