The matching principle is one of the accounting principles that require, as its name, the matching between revenues and their related expenses.
The expenses that correlated with revenues should be recognized in the same period in the financial statements.
This concept tries to make sure that there no over or under revenue or expenses records in the financial statements. If the revenue or expenses records inconsistently, then there will be over or under revenue or expenses.
The users who use that financial information as the reference for making the decision will become the victim because of that information.
This principle concern the recognition of two important elements. One is revenue and anther is related expenses. The related expenses here refer to the expenses that occur in correlation with the revenues. But, what we mean by related?
Here is the example,
For example, when we sell the goods to our customers, the revenue then increases and decreasing the inventories. The reduction of the inventories in corresponding to revenues is called cost of goods sold.
Based on Matching principle, Cost of Goods Sold should record in the period in which the revenues are earned.
Another example is, the sale man in your company could earn some commission as the result of their sales performance. Let say, 5% of the sales commission will be provided to the salesman.
The commission is provided only when sales transactions are made. At the month of December 2016, the salesman could earn 2,000$, but the payment of the commission will be payable in January of the following year.
How do we apply the Matching Principle for this case?
Well, base on Matching Principle, even the commission is paid in January, but the commission expenses have to recognize and records in the months of December 2016.
Matching principle: Matching between expenses and revenues
Examples of Matching Principle:
The following are the examples of Matching Principle:
Assume we have sold the goods to our customers amount $70,000 for the month of December 2016. These goods have the cost of goods sold the amount of $40,000.
Based on the Matching Principle, the cost of goods sold amount $40,000 have to records in the month of December 2016 same as revenue $70,000 recognize. The marching principle here is recognized in the same ways as accrual basis or cash basis.
The company prepare the financial statements on an accrual basis, then revenue and expenses are the recognize consistently the same as cash basis.
For example, base on a cash basis, the revenue amount $70,000 recognize only when the cash is the receipt.
In this case, when we use the Matching Principle with a cash basis. Assume the revenue per cash basis is recognized in January 2017, then the cost of goods sold $40,000 should also recognize in 2017 as well.
Another example is related to depreciation expenses. The concept is that the expenses of fixed assets should not records imitatively at the time we purchase.
But should be proportion to the economic use or in the ways how fixed assets contribute to sales revenue as well as production. The depreciation concept is consistence with matching concept.
For example, If the fixed assets amount $50,000 and depreciation for five years as the result of economic use. Then, the depreciation expenses amount of $10,000 per years should be recorded.
An additional similar example related to the Matching Principle is accrual salaries. Let be more specific so that you could get a better understanding. The salary of sale person.
The salary expenses are the cost of services the company render from its staff. The services render of which months, salary expenses should be records on that moths.
For example, the cost of rendering service amount $60,000 occurred in February should be recorded as the expenses in February.
No matter these expenses paid to employee this month or not. These expenses are matched to the services the company consume.
Advantages of Matching Principle:
Matching principle is quite an importance to users of the financial statements especially to understand the nature of expenses that records in the entity’s financial statements.
For example, when the users use financial statements and they see the cost of goods sold are increasing, then they will note that the sales revenue should be increasing consistently.
If the revenue and cost of goods sold are increasing inconsistently, then neither of these two-figure probably have some problem. Maybe the revenue or goods of goods sold are overstated or understated.
In general, Matching principle help both accountants in recognizing the accounting transactions in some uncertainty situation and users of financial transactions for using the financial information of the entity.
An accountant will recognize both expenses and revenue then they are correlated even though cash flow run inconsistently.
Written by Sinra