What Is the Matching Principle? (2024)

FAQs

What is the matching principle answer? ›

What is the Matching Principle? The matching principle is an accounting concept that dictates that companies report expenses at the same time as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of time (e.g., a year, quarter, or month).

According to this principle, revenue should be recognized when it is earned, and not when it is received. The matching principle, on the other hand, when applied to revenue recognition, requires the expenses associated with generating that revenue to be recognized at the same time as the revenue.

The matching principle is related to the revenue and the expense principles. The matching principle states that when you recognize revenue, you should match related expenses with the revenue. The best example of the matching principle concerns the case of businesses that resell inventory.

Accounting principles are essential for accurate financial reporting and analysis in businesses. They provide guidelines for recording transactions, preparing financial statements and detecting fraud. Key accounting principles include accrual, conservatism, cost, revenue recognition, and economic entity principles.

Example of Matching Principle

For example, if a business pays a 10% commission to sales representatives at the end of each month. If the company has $50,000 in sales in the month of December, the company will pay the commission of $5,000 next January.

The matching principle, a fundamental rule in the accrual-based accounting system, requires expenses to be recognized in the same period as the applicable revenue. For instance, the direct cost of a product is expensed on the income statement only if the product is sold and delivered to the customer.

Helps determine the company's financial status by keeping financial statements consistent: The matching principle in accounting aligns expenses and revenues, ensuring consistency in financial statements and preventing misrepresenting of financial results.

d. Revenue of the period is matched with expenses required to create those revenues. This is the correct option.

The accounting principle of matching is best demonstrated by: b. Associating effort (expense) with accomplishment (revenue). The matching principle requires any expenses associated with revenue to be recorded in the same period.

The purpose of the matching principle is to maintain consistency across a business's income statements and balance sheets. Here's how it works: Expenses are recorded on the income statement in the same period that related revenues are earned.

Which method follows the matching principle? ›

This method allows the current and future cash inflows or outflows to be combined to give a more accurate picture of a company's current and long-term finances. Accrual accounting follows the matching principle, which states that revenues and expenses should be recorded in the same period.

Correct Answer: Option C) Expense recognition principle. Explanation: As per the matching principle, the revenues earned during the period should be matched with the expenses that were incurred to generate the revenues.

There are four basic principles of financial accounting measurement: (1) objectivity, (2) matching, (3) revenue recognition, and (4) consistency. 3. A special method, called the equity method, is used to value certain long-term equity investments on the balance sheet.

For example, accountants report purchases of machinery as an asset instead of an expense because, as per the going concern principle, the organisation will continue in the foreseeable future. This helps the accountant allocate the cost of the machinery over its useful life.

The matching approach, also known as hedging approach, is a type of technique used by the management to lower the risk of financing and the funds used to do it. The matching approach implies that a firm must use its short term funds to finance the current assets and the long term funds to finance the long term assets.

According to the matching principle, the purchase price of a fixed asset is not related to the accounting period because the benefit derived from its use will be spread over a number of years. Therefore, only depreciation related to the accounting period is considered for determination of profit.

Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made. The method follows the matching principle, which says that revenues and expenses should be recognized in the same period.