![]() ![]() The main benefit of the matching principle is that it can help organisations get a more accurate picture of their actual financial position. Related: What is average total cost formula and how to calculate it Benefits of the matching principle Even though the company pays the salesperson their December sales commission in January, accounting following the matching principle would report December commission costs in the December income statement, not the January statement, to properly match all product costs for December against the December revenue. Suppose a salesperson receives a commission for their monthly product sales, paid to them the following month. Following the matching principle, organisations recognise product costs during the same timeframe as they recognise the revenue. This is the total cost associated with the acquisition and production of a product. Related: 8 types of costs in accounting (with calculations) Product costs For instance, even if an organisation pays rent for its offices one month in advance, they still match the rent for June against the June revenue, rather than accounting for it in May. Following the matching principle, an organisation records these costs as expenses on the income statement during the time period they experienced them. Things like wages, rent expenses or office supply costs are examples of period costs. These costs don't directly relate to a product and may not vary in relation to revenue. Here are details of the two main cost components of the matching principle: Period costs Related: Guide: what is bookkeeping and what do bookkeepers do? Cost components of the matching principle ![]() Properly accounting for revenue you're going to receive later and upcoming costs provides a clear picture of an organisation's actual financial situation. It keeps a revenue and expense record for a hypothetical situation where you always exchange cash at the point of purchase or sale. A business still accounts for this income and expenditure.Īccrual accounting offers advantages by accounting for revenue and expenses for the period you incur them rather than the period of cash flow. They may have incurred expenses that they won't pay until later in the year. Businesses may provide goods or services that earn revenue but haven't actually received payment for them yet. Rather than waiting until cash comes in, accrual accounting reports revenue and expenses as a business incurs them. Related: What is basic accounting? (Principles, jobs and education) What is accrual accounting?Īccrual accounting captures revenue and expenses regardless of whether or not a company has yet received that revenue or paid those expenses. The matching principle is part of the accrual accounting method. These may be yearly, quarterly or monthly statements, for example. Businesses using the matching principle in their accounting match related revenue and expenses on their income statement for a period of time. It works from the principle that businesses incur expenses to generate revenue. The matching principle is an accounting approach that has an organisation report expenses at the same time they report the revenue associated with these expenses, even if they haven't yet paid the cash. Some accounting approaches record an expense when the business pays cash, for example. Businesses may incur expenses related to their business activity and there are many different approaches for reporting these expenses. The matching principle in accounting is an approach for reporting income and expenditures. What is the matching principle in accounting? In this article, we learn about the matching principle in accounting, the cost components involved and the advantages of the matching principle and its possible drawbacks and examine a scenario that uses the matching principle. ![]() If you're interested in accounting, you may wish to learn more about various accounting methods and how they can give different insights into a company's financial position. Different methods may be appropriate in different circumstances. Organisations may use many different accounting methods to track their revenue and expenditures. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |