The matching principle allows for consistency in financial reporting, working off the premise that business expenses are required in order to generate revenue. In order to abide by the matching principle, Jim or his accountant will need to accrue the $900 expense in January, and later reverse the commission expense in February, after it’s been paid. However, the commission payment will not be processed until the 15th of February. If Jim didn’t accrue the $900 in January, his sales of $9,000 would be reported in January, and the related commission expense would be reported in February. In order to properly account for these wages in the correct month (April), you will need to accrue payroll expenses in the amount of $4,150.According to the matching principle, both the commission fees (expenses) and cosmetic sales (related revenue) must be recorded in the same accounting period.Not all costs and expenses have a cause and effect relationship with revenues.Because of this, businesses often choose to spread the cost of the building over years or decades.Under the matching principle, you would not record the cost of the inventory as an expense in January. For example, let’s say your company purchases inventory in January with the intention of selling it later in the year. In order to properly use the matching principle for your prepaid expenses, you will record a recurring journal entry in the amount of $1,250 each month for the next 12 months. Only the accrual accounting method is able to use the matching principle, since cash accounting does not use the revenue recognition principle that accrual accounting uses. It does matter what type of accounting method you employ when using the matching principle. In other words, it formally acknowledges that business must spend money in order to earn revenue.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |