What is the matching principle? Explain in detail what methods of accounting and what types of assets most easily conform to the matching principle.
Based on the video that was supplied, Matching principle is defined as the action of ensuring expense match with revenue. This is typically applied when completing Accrual Accounting and you are aligning revenue and expenses to the period of which they were incurred. In other words, the expenses will not be tracked when they are paid, but when the revenue is applied. (UMGC,2016)
Typical companies would use this type method because it allows the investors to see consistency in the business fiscal statements, that allows it easier to account for business revenue and net income especially for tax season. (Indeed, 2021)
There are two components of the matching principle: Period Costs and Product Costs. Period Costs is defined as the costs that are unrelated to a product. Such as rent, commissions, or office supplies. Product cost is defined by Indeed editorial team at the total amount of cost associated with a product as it is related to its acquisition and production. The matching principle requires product cost to have recognition simultaneously to revenue. For example, if a car salesman makes a commission from a product, they would need to invoice the customer in December to correlate with all Decembers cost associated with creating and delivering that product.
For more information regarding the Matching principle please refer below:
Indeed Editorial Team. (2021, July 23). Matching Principle: Definintion and Examples. Retrieved from Indeed: https://www.indeed.com/career-advice/career-development/matching-principle-definition-and-examples
UMGC (Director). (2016). Accrual Accounting [Motion Picture].
Timing is a major factor between cash and accrual accounting. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it’s earned, and expenses when they’re billed (but not paid).
According to resources, Most Organizations used accrual because the accrual basis gives a more realistic idea of income and expenses during a period of time, therefore providing a long-term picture of the business that cash accounting can’t provide.
3) Introduction to Financial Accounting (Dauderis and Annand, 2014A)
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4) Small Business Management in 21st Century (Saylor Academy, 2012)
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