The marching principle is recognized in the same ways as accrual or cash. These goods have the cost of goods sold in the amount of $40,000.īased on the Matching Principle, the cost of goods sold amount $40,000 have to be recorded in December 2016, same as revenue of $70,000 recognized. The following are the examples of the Matching Principle: Example 1:Īssume we have sold the goods to our customers amount $70,000 for the month of December 2016. Matching principle: Matching between expenses and revenues Examples of Matching Principle: In December 2016, the salesman could earn 2,000$, but the commission payment will be payable in January of the following year. The commission is provided only when sales transactions are made. 5% of the sales commission will be provided to the salesman. The reduction of the inventories corresponding to revenues is called the cost of goods sold.īased on the Matching principle, the Cost of Goods Sold should record the period in which the revenues are earned.Īnother example is that the salesman in your company could earn some commission due to their sales performance. But, what do we mean by related?įor example, when we sell the goods to our customers, the revenue increases and decreases the inventories. The related expenses here refer to the expenses that occur in correlation with the revenues. One is revenue, and another is related to expenses. This principle concerns the recognition of two essential elements. The users who use that financial information as the reference for making the decision will become the victim. If the revenue or expenses are recorded inconsistently, then there will be over or under income or expenses. This concept tries to ensure that there are no over or under revenue or expenses records in the financial statements. The expenses correlated with revenues should be recognized in the same period in the financial statements. In the case of prepaid rent, for instance, the cost of rent for the period would be deducted from the Prepaid Rent account.The matching principle is one of the accounting principles that require, as its name, the matching between revenues and their related expenses. As a prepaid expense is used, an adjusting entry is made to update the value of the asset. Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognized as expenses they are considered assets because they will provide probable future benefits. Lastly, if no connection with revenues can be established, costs are recognized immediately as expenses (e.g., general administrative and research and development costs). Prepaid expenses are not recognized as expenses, but as assets until one of the qualifying conditions is met resulting in a recognition as expenses. Conversely, cash basis accounting calls for the recognition of an expense when the cash is paid, regardless of when the expense was actually incurred.If no cause-and-effect relationship exists (e.g., a sale is impossible), costs are recognized as expenses in the accounting period they expired: i.e., when have been used up or consumed (e.g., of spoiled, dated, or substandard goods, or not demanded services). By recognizing costs in the period they are incurred, a business can see how much money was spent to generate revenue, reducing "noise" from timing mismatch between when costs are incurred and when revenue is realized. And the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting. In accrual accounting, the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs. Wikipedia Rate this definition: 0.0 / 0 votes
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