Is the Matching Concept Related to the Cash Accounting or the Accrual Accounting for a Business? (2024)

FAQs

Is the Matching Concept Related to the Cash Accounting or the Accrual Accounting for a Business? ›

The matching concept, or matching principle, is a fundamental element of accrual-basis accounting. In accrual accounting, a company records revenue in its books as soon as it has done everything necessary to earn that revenue, regardless of when money actually comes in.

Accrual accounting follows the matching principle, which states that revenues and expenses should be recorded in the same period. Accrual accounting is encouraged by International Financial Reporting Standards(IFRS) and Generally Accepted Accounting Principles (GAAP).

It is the underlying principle of the accrual basis of accounting. Since cash basis realizes the revenue or expenses as and when actual cash is received or paid respectively, the element of matching principle becomes incompatible here.

Difference Between Accrual and Matching Concept

The accrual concept refers to recording the transactions whenever they are incurred or earned, regardless of actual outflow or inflow of cash. On the other hand, the matching concept specifically focuses on recognition and recording transactions of expenses in business.

The matching principle operates alongside accrual accounting. With the matching principle, you must match expenses with related revenues and report both at the end of an accounting period.

Matching concept states that expenses that are incurred in an accounting period should be matching with the revenue earned during that period.

The matching concept is an accounting practice whereby firms recognize revenues and their related expenses in the same accounting period. Firms report "revenues," that is, along with the "expenses" that brought them. The purpose of the matching concept is to avoid misstating earnings for a period.

Accrual basis of accounting follows the matching principle, which states that expenses and revenues should be recognised in the same accounting period.

The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it's earned, and expenses when they're billed (but not paid).

d. Revenue of the period is matched with expenses required to create those revenues. This is the correct option. Examples are the cost of goods sold, bad debts, and warranty expenses that are recorded in the same period as the related sales revenue is recorded.

What is another name for the matching concept? ›

You could look at the matching concept in accounting as a blend of accrual accounting methods and the revenue recognition principle. According to the revenue recognition principle, revenue must be recognized and recorded on the income statement when it's earned or realized.

The concept in accrual basis of accounting is that accounting transactions should be recorded in the accounting periods when they actually occur i.e. when the transactions occur, rather than in the periods when there are cash flows associated with them.

The matching principle is an accounting principle which states that expenses should be recognised in the same reporting period as the related revenues.

The Matching Principle in accounting means recording expenses at the same time as the revenues they help earn. This helps show the real profit of a company during a specific period, making financial reports more accurate.

For example, if the company has provided a service to a customer but has not yet received payment, it would make a journal entry to record the revenue from that service as an accrual. This would involve debiting the "accounts receivable" account and crediting the "revenue" account on the income statement.

The accrual accounting principles are guidelines that determine how and when revenue and expenses are recognized in financial and income statements. The two fundamental principles are the revenue recognition principle and the matching principle.

Only the accrual accounting method is allowed by generally accepted accounting principles (GAAP). Accrual accounting recognizes costs and expenses when they occur rather than when actual cash is exchanged.

This accounting method is based on the matching principle of GAAP, which states that all revenue and expenses must be reported in the same period and matched so that profits and losses for the period can be determined.

Accrual basis accounting combines two key accounting principles: the matching principle and the revenue recognition principle. The matching principle says that expenses should be recognized in the same period as the revenue they help generate.