While accrual accounting is not a flawless system, the standardization of financial statements encourages more consistency than cash-based accounting. The matching principle stabilizes the financial performance of companies to prevent sudden increases (or decreases) in profitability which can often be misleading without understanding the full context.Īs we observed in our simple modeling exercise, depreciation distributes the total CapEx over the course of its expected life span to balance out the expenses and prevent misrepresentations of profitability on the income statement. Expenses not directly tied to revenue production should be expensed immediately in the current period.Expenditures that provide benefits for more than one year should be allocated across the asset’s useful life assumption.Expenses must be recognized on the income statement in the same period as when the coinciding revenues were earned.The general guidelines under the matching principle are as follows: The purpose of the matching principle is to maintain consistency in the core financial statements - in particular, the income statement and balance sheet. Matching Principle Impact: Revenue and Expense Recognition However, the matching principle matches expenses with the revenue they helped generate, as opposed to being recorded in the period the actual cash outflow was incurred. ![]() ![]() In contrast, cash-basis accounting would record the expense once the cash changes hands between the parties involved in the transaction. 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.įor instance, the direct cost of a product is expensed on the income statement only if the product is sold and delivered to the customer. Per the matching principle, expenses are recognized once the income resulting from the expenses is recognized and “earned” under accrual accounting standards. The Matching Principle states the expenses of a company must be recognized in the same period as when the corresponding revenue was “earned.”
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