Monthly Archives: July 2020

The matching principle concept is extremely beneficial when it comes to reporting revenues and expenses. An expense needs to relate to the time period that it occurred and not during the actual payment of the invoices. Assume that a business gives out commissions to its representatives at 10% of their sales, disbursed at the end of the month.

Step1: Identify Revenue

The revenue recognition principle states that revenues should be recognized, or recorded, when they are earned, regardless of when cash is received. The store sells clothing items to customers, and revenue is recognized income statement at the point of sale. The matching principle is also followed, where the cost of goods sold is matched with the revenue earned.

• It is then deducted from accrued expenses in the subsequent period to prevent a fictitious loss when the representative is compensated.
• Revenue recognition is based on the principle that revenue should be recognized when it is earned, and not when cash is received.
• The revenue recognition and matching principle are two concepts that are critical to financial accounting.
• Although it does not ignore cash transactions, accrual accounting is primarily accounting for non-cash assets, liabilities, revenues, expenses, gains and losses.
• The matching concept or principle has special importance in the accrual accounting concept.
• Recording expenses in the time period they were incurred to produce revenues, thus matching them against the revenues earned during that same period.
• The workspace is connected and allows users to assign and track tasks for each close task category for input, review, and approval with the stakeholders.

What is the relationship between the matching principle and revenue recognition?

The earned revenue becomes sales revenue, which is recognized in the income statement of the company. The consistent use of accounting methods and procedures over time will check the distortion of profit and loss account and balance sheet and the possible manipulation of these statements. Consistency is necessary to help external users in comparing financial statements of a given firm over time and in making their decisions. The remaining elements of costs which are regarded as continuing to have future service potential are carried forward in the historical balance sheet and are termed as assets. Thus, the balance sheet is nothing more than a report of unallocated past costs waiting expiry of their estimated future service potential before being matched with suitable revenues.

Financial Reconciliation Solutions

• CFOs like to steer clear of ‘revenue leak‘—essentially, gaps between the profits on the books and the cash actually making its way to the bank.
• Both principles work together to ensure that financial statements accurately reflect the financial performance of a company over a given period.
• This principle, commonly used under accrual accounting standards, assists in creating a more accurate financial snapshot by aligning revenues with related expenditures.
• The matching principle also plays a role in this, as revenues should be recognized in the period in which they are earned, and expenses should be recognized in the period in which they are incurred.
• The expense must relate to the period in which the expense occurs rather than on the period of actually paying invoices.

Our AI-powered Anomaly Management Software helps accounting professionals identify and rectify potential ‘Errors and Omissions’ throughout the financial period so that teams can avoid the month-end rush. The AI algorithm continuously learns through a feedback loop which, in turn, reduces false anomalies. We empower accounting teams to work more efficiently, accurately, and collaboratively, enabling them to add greater value to their organizations’ accounting processes. Revenue recognition is complex due to factors such as project completion timing and revenue allocation for different product parts. Let’s look at an example of how Car Dealership Accounting the matching principle helps a company understand the indirect costs of a new piece of equipment that depreciates over time.

As we can see in this example, two transactions have been spread across a total of three years. This example is designed to illustrate the importance of the matching principle as, even though the materials were purchased in year 1, they weren’t sold until year 2. If expenses were reported as soon as they occurred, then company statements would be very inconsistent and profit figures would not be comparable.

• Consider that a business incurs the cost of ₹10,00,00,000 on buying an office space expecting that it will serve the business for a period of ten years.
• Consistency is necessary to help external users in comparing financial statements of a given firm over time and in making their decisions.
• Cash flow statements, though focused on cash transactions, are indirectly influenced by the matching principle.
• Cash received or paid before revenues have been earned or expenses have been incurred.
• If accounting methods are frequently changed, comparison of its financial statements for one period with those of another period would be difficult.

When a company earns revenue from selling a product or service, any expenses that contributed to that sale should take the stage in the same period. A business cannot generate revenues without incurring necessary expenses like materials, labor, manufacturing overhead, marketing and administrative expenses, etc. Depreciation allocates the cost of an asset over its accounting matching principle expected lifespan according to the matching principle. For example, if a machine is purchased for $100,000, has a lifespan of 10 years, and produces the same amount of goods each year, then $10,000 of the cost (i.e., $100,000 divided by 10 years) is allocated to each year. This approach avoids charging the entire $100,000 in the first year and none in the subsequent nine years.