![]() Accountants call this the matching principle-the appropriate costs should be matched to all the sales for the period represented in the income statement-and it’s the key to understanding how profit is determined. The costs and expenses on the income statement are those it incurred in generating the sales recorded during that time period. No money at all may have changed hands.Īnd the “cost” lines of the income statement? Well, the costs and expenses a company reports are not necessarily the ones it wrote checks for during that period. Never mind if the customer hasn’t paid for the product or service yet-the business may count the amount of the sale on the top line of its income statement for the period in question. ![]() ![]() When a business delivers a product or a service to a customer, accountants say it has made a sale. (Excerpts from Financial Intelligence, Chapter 5 – Profit is an Estimate)Īny income statement begins with sales. A company may pay its tax bill once a quarter-but every month the income statement includes a figure reflecting the taxes owed on that month’s profits. The matching principle even extends to items like taxes. Rather it records the cost of each cartridge on the income statement when the cartridge is sold. If an ink-and-toner company buys a truckload of cartridges in June to resell to customers over the next several months, it does not record the cost of all those cartridges in June. Here are two examples of the matching principle: Sign up for our online financial statement training and get the income statement training you need. It simply states, “Match the sale with its associated costs to determine profits in a given period of time-usually a month, quarter, or year.” In other words, one of the accountants’ primary jobs is to figure out and properly record all the costs incurred in generating sales, including the cost to make and deliver the product and the sales and administrative support.īecause of the matching principle, the expenses on the statement are not necessarily those things that we purchased that month, or even paid for that month. The matching principle helps you to balance the cost over a period once you recognize it at the right time.The matching principle is a fundamental accounting rule for preparing an income statement. If you recognize the expenses at the wrong time, you may get the inaccurate financial report of a business. Earlier expense recognition may result in a lower net income. What Are the Benefits of the Matching Principle?įor ensuring consistency in financial statements, businesses follow the matching principle. He earns his fee the moment he finishes the job. It has nothing to do with the payment, whether it is received or not.Ī contractor who completes his job won’t wait for the payment. It is a basic accounting principle which states, the recognition and recording of revenue should be in the same period it’s earning. Other examples of the matching principle are: If a company uses the money basis of accounting, the reporting of commission should be in October (in the month they were paid) instead of September (the month in which they incur). The matching principle states that the commission expense needs reporting in September’s income statement. If the organization has $100,000 in deals in September, the organization will pay the commission of $20,000 next October. Suppose a business pays a 20% commission to sales assistants by the end of every month. Match the expenses in a current period of time during which they incur rather than a time when payment is complete. The matching principle in accounting states that matching the reporting revenues and expenses in the same period links the revenue with its profit. The basic concept of the accrual accounting method is: The matching principle is an important component in the accrual method of accounting. What Is the Matching Concept in Accounting? What Are the Benefits of the Matching Principle?.What Is the Matching Concept in Accounting?.If there is no cause and effect relationship, at that point, the accountant will charge the cost to the expense right away. The matching principle depends on the cause-and-effect relationship. The purpose of the matching principle is to maintain consistency across a business’s income statements and balance sheets. It is part of ‘Generally Accepted Accounting Principles (GAAP). The matching principle is the accounting principle that states, ‘recording the costs and earning of revenues should be in the same accounting period.
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