Matching principle of accounting8/30/2023 ![]() GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Overall, it’s a good idea to understand the matching principle for the purpose of day-to-day accounting. Still, these are limited situations where it becomes more difficult to use. More challenging when there is no direct cause-and-effect relationship between revenues and expensesĭoesn’t work as well when related revenue is spread out over time, as with marketing or advertising costs There are some limitations to this concept, including the following: On the other hand, some businesses might choose the cash accounting method instead of accrual, in which case the matching principle might not be the best choice. Less chance of misstating profits during a particular accounting periodĭepreciation costs can be distributed over time Greater accuracy when representing the company’s financial position There are several benefits to using the matching principle when preparing your financial statements:Ĭonsistency across financial statements, including the balance sheet and income statement This means that both should be recorded in the November income statement.īy contrast, if the company used the cash basis of accounting rather than accrual, they would record the revenue in November and the commission in December. For the month of November, the company earned $100,000 in sales, and they will pay their sales reps $10,000 in resulting commission fees in December.Īccording to the matching principle, both the commission fees (expenses) and cosmetic sales (related revenue) must be recorded in the same accounting period. ![]() To better understand how this concept works in the real world, imagine the following matching principle example.Ī cosmetics company uses sales representatives, who earn a 10% commission on their sales at the end of each month. An example of revenue recognition would be a contractor recording revenue when a single job is complete, even if the customer doesn’t pay the invoice until the following accounting period. Businesses don’t have to wait for the cash payment to be received to record this sales revenue. ![]() You could look at the matching concept in accounting as a blend of accrual accounting methods and the revenue recognition principle.Īccording to the revenue recognition principle, revenue must be recognized and recorded on the income statement when it’s earned or realized. On the other hand, if you recognize it too late, this will raise net income. For example, if you recognize an expense too early it reduces net income. This can potentially distort financial statements and give investors an unclear view of the overall financial position. When expenses are recognized too early or late, it can be difficult to see where they result in revenue. Liabilities are recorded on the balance sheet at the end of the accounting period.Įxpenses not directly tied to revenues should be reported on the income statement in the same period as their use. Here’s how it works:Įxpenses are recorded on the income statement in the same period that related revenues are earned. The purpose of the matching principle is to maintain consistency across a business’s income statements and balance sheets. ![]() How the matching concept in accounting works If there is no cause-and-effect relationship leading to future related revenue, then the expenses can be recorded immediately without adjusting entries. ![]() In other words, it formally acknowledges that business must spend money in order to earn revenue.Īccrual accounting is based on the matching principle, which defines how and when businesses adjust the balance sheet. It requires that any business expenses incurred must be recorded in the same period as related revenues. The matching principle is part of the Generally Accepted Accounting Principles (GAAP), based on the cause-and-effect relationship between spending and earning. So, what is the matching principle in accounting, and when is it used? Understanding the matching principle The matching principle offers a way to recognize this idea in accounting. There’s a common concept in business that you have to spend money to make money. ![]()
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