Matching principle is an accounting concept that helps an organization to record expenses and related revenues within the same period. The matching principle requires that an organization’s incurred expenses should be recorded within the same period with the related revenues that are facilitated by the expenses. This implies that expenses should be recorded in the period when they generate revenue rather than the period they are paid. For instance, a company that pays a sales commission of 10% of total sales made total sales amounting to $30,000 in December. The agent is paid in January $3000. According to the matching principle, the organization should record the commission in December instead of January. This is because the company enjoyed the returns of the expense in December but not in January.
Expenses that cannot be matched to any revenue should be recorded for the period when it expires or gets used. Expenses hose future benefit cannot be evaluated are recorded immediately. Matching principle assist the organization to match the benefits of revenues or assets with their incurred costs. The following are some of the reasons why the matching principle is important in accounting.
An organization should maintain consistency in their income statements throughout its lifespan. This ensures exceptional neatness and accuracy of data. The matching principle ensures a proper flow of revenues and expenses as they occur. This avoids distortion in the income reports regarding the performance of the organization. Investors and other stakeholders will understand a well-balanced and consistent report more easily than a distorted one. By matching expenses against the revenue they have helped generate, an interested party can easily determine the economic direction of the organization.
The matching principle enhances the accuracy of the income statements is preserved. Recording expenses and revenues earlier or later affect the accuracy of both income statements the balance sheet. Recording revenues later than the expenses can easily cause an understatement. On the other hand, recording revenues earlier than the expenses that help earn them can easily lead to an overstated financial report.
As stated above, matching principles ensures that expenses and revenues are recorded appropriately. Organizations should record revenues and expenses at the appropriate time to ensure that they remain relevant. The matching principle helps the organization to determine the appropriate time to record their costs and related benefits. For instance, a paid expense that occurs over a long period but its benefit realized once, it can be confusing when to enter the transactions. The matching principle requires the accountant to enter the expense in time when its benefit was accrued.
The matching principle requires that expenses should be acknowledged systematically and rationally. This lays the framework for calculating the depreciation of an asset and matching it with its benefits. Recording depreciation in a single accounting period can lead to misstatement of the final report of that period. This could cause the statements to read huge loss on that period while overstating the benefits in other prior periods. Matching principle ensures that the organization recognizes and evaluates depreciation as it happens over its lifespan. Students struggling with matching principle accounting papers seek help from accounting class help.
Matching expenses against revenues provides a more correct evaluation of the outcomes of operations. It assists in avoiding distortion of the financial reports of the business and improves the quality and consistency of the financial statements. The matching principle ensures high consistency of financial statements during the lifespan of the business. Investors can, therefore, easily understand the reports and evaluate the projected performance of the business. In conclusion, the matching principle aids accountants in evaluating accounting operations. It also helps the users of financial reports to easily determine the overall performance of the business.