Relationship between matching principle and accrual method of accounting

Matching Concept Vs. Accrual Accounting |

i think the relationship is that the matching principle is the accrual basis is contrasted with cash basis accounting, which is just cash coming. The matching principle and the accounting (time) period assumption are can be allocated among accounting periods in a systematic way (for. In deciding how to keep the books for your business, you have two options: cash- basis accounting or accrual-basis accounting. The difference between them.

Accrued expenses[ edit ] For example, goods supplied by a vendor in one accounting periodbut paying for them in a later period results in an accrued expense that prevents a fictitious increase in the receiving company's value equal to the increase in its inventory assets by the cost of the goods received, but unpaid.

Without such accrued expense, a sale of such goods in the period they were supplied would cause that the unpaid inventory recognized as an expense fictitiously incurred would effectively offset the sale proceeds revenue resulting in a fictitious profit in the period of sale, and in a fictitious loss in the latter period of payment, both equal to the cost of goods sold.

Period costs, such as office salaries or selling expenses, are immediately recognized as expenses and offset against revenues of the accounting period also when employees are paid in the next period.

Unpaid period costs are accrued expenses liabilities to avoid such costs as expenses fictitiously incurred to offset period revenues that would result in a fictitious profit.

Matching Concept Vs. Accrual Accounting | Bizfluent

An example is a commission earned at the moment of sale or delivery by a sales representative who is compensated at the end of the following week, in the next accounting period. The company recognizes the commission as an expense incurred immediately in its current income statement to match the sale proceeds revenueso the commission is also added to accrued expenses in the sale period to prevent it from otherwise becoming a fictitious profit, and it is deducted from accrued expenses in the next period to prevent it from otherwise becoming a fictitious loss, when the rep is compensated.

Deferred expenses[ edit ] A Deferred expense prepaid expenses or prepayment is an asset used to costs paid out and not recognized as expenses according to the matching principle. Earning "revenues" means meeting two conditions. Firstly, revenues must be realizable. Revenues from sales of goods and services are said to be "realizable" only when there is a good reason to believe payment is forthcoming. Secondly, the seller has in fact delivered the goods and services. Revenues earned during the period, therefore, may exist as accounts receivable, other receivablesor as cash received.

Apply Matching Concept Step by Step. Understand Meaning, Purpose.

Under accrual accounting, consuming resources incurs expenses. Note especially that the accountant's definition of "expense" refers to assets. An expense for delivery vehicle fuel, for instance, uses up cash assets. When revenues and expenses are not directly connected, they can be allocated among accounting periods in a systematic way for example: As we can see, the matching principle depends on the accounting period assumption.

Matching principle

The allocation of expenses and revenues to a specific accounting period requires an assumption about the length of the accounting period. Important to note, both the matching principle and the accounting period assumption are related to the going concern assumption, another income measurement assumption.

Accrual Accounting: Revenue Recognition And The Matching Principle - Slides 1-15

According to the going concern continuity assumption, financial activities of a business are assumed to be in operation for an indefinite period of time. This assumption allows for a systematic allocation of certain revenues and expenses. As allocating revenues and expenses to a specific accounting period requires choosing the number of accounting periods, the matching principle, the accounting period assumption, and the going-concern assumptions are related.