When to Use the Matching Principleīecause use of the matching principle can be labor-intensive, company controllers do not usually employ it for immaterial items. For example, it can be difficult to determine the impact of ongoing marketing expenditures on sales, so it is customary to charge marketing expenditures to expense as incurred. There are also cases in which there is no cause-and-effect relationship between revenues and expenses, making it difficult to decide whether to spread expense recognition across several reporting periods, and how much to charge to expense in each period. Doing so is moderately complex, making it difficult for smaller businesses without accountants to use. It requires additional accountant effort to record accruals to shift expenses across reporting periods. There are situations in which using the matching principle can be a disadvantage. This is especially important in relation to charging off the cost of fixed assets through depreciation, rather than charging the entire amount of these assets to expense as soon as they are purchased. It also results in more consistent reporting of profits across reporting periods, minimizing large fluctuations. This is particularly important when a firm generally operates near a breakeven level. First, it minimizes the risk of misstating whether a business has generated a profit or loss in any given reporting period. There are several advantages to using the matching principle. The cash balance declines as a result of paying the commission, which also eliminates the liability. An example of such an entry for a commission payment is: Recording items under the matching principle typically requires the use of an accrual entry. The company should recognize the entire $2,000 cost as expense in the same reporting period as the sale, since the recognition of revenue and the cost of goods sold are tightly linked. The cost of the goods sold for these units is $2,000. Matching Principle for the Cost of Goods SoldĪ company sells 50 units of a product for $5,000. The employer should record an expense in March for those wages earned from March 29 to March 31. The pay period for hourly employees ends on March 28, but employees continue to earn wages through March 31, which are paid to them on April 4. You should record the bonus expense within the year when the employee earned it. Under a bonus plan, an employee earns a $50,000 bonus based on measurable aspects of her performance within a year. It should charge the cost of the equipment to depreciation expense at the rate of $10,000 per year for ten years, so that the expense is recognized over the entirety of its useful life. You should record the commission expense in January, so that the expense is recognized in the same month as the associated sale.Ī company acquires production equipment for $100,000 that has a projected useful life of 10 years. The commission of $5,000 is paid in February. Matching Principle for CommissionsĪ salesman earns a 5% commission on sales shipped and recorded in January. Several examples of the matching principle are noted below, for commissions, depreciation, bonus payments, wages, and the cost of goods sold. Instead, when revenues are reported, all associated expenses are also reported at the same time. Doing so ensures that the reporting of profits is not artificially accelerated or delayed in any reporting period. This is one of the most essential concepts in accrual basis accounting, since it mandates that the entire effect of a transaction be recorded within the same reporting period. If there is no cause-and-effect relationship, then charge the cost to expense at once. In some cases, it will be necessary to conduct a systematic allocation of a cost across multiple reporting periods, such as when the purchase cost of a fixed asset is depreciated over several years. Thus, if there is a cause-and-effect relationship between revenue and certain expenses, then record them at the same time. The matching principle requires that revenues and any related expenses be recognized together in the same reporting period.
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