The Matching Principle enables companies to be able to correctly record revenues as they are earned even when cash is not yet received and their corresponding expenses to be recorded even when they have not been paid yet.

When the company is able to match their expenses to the time when revenues are earned, it provides investors a clearer idea of the financial performance of the company and whether or not they are able operate efficiently. The payment will no longer have an impact on the Income Statement but will decrease both the payables and the cash account. In 2021, when the commission is paid, the entry to record the payment is: The Income Statement will show an increase of $2,500 due to the commissions while the Balance Sheet will also increase by $2,500 in Current Liabilities. In the commissions example above, the entry to record the commission expense earned by the salesman for the year 2020 is: The bonus was recorded not for the year that the employees were paid but for the year that they earned it. When companies are profitable, they are more inclined to give out bonuses to their employees.Īssuming the company has made considerable profit for the year 2020 and decided to give out a $1,000 bonus to all their employees, the bonus was paid only in the third month of the following year but was recorded in the books for the year 2020. BonusesĮmployee bonuses depend on the performance of a company for a given period. CommissionsĪ Salesman was able to bring in $25,000 to the company for the year 2020 and is entitled to a $2,500 commission.Įven when the commission is paid in 2021, the commission expense should be recorded in 2021. recorded as an expense over its useful lifeįor each year, the depreciation expense to be recorded is $20,000.

When a company purchases machinery for their plant operations for $200,000 and is expected to generate revenue for the company for 10 years (useful life), the cost of the acquisition shall be. In the accrual basis of accounting, this is done by recording the transactions as they occur even when the actual cash from the revenue is not yet received or expenses are incurred but cash is not paid yet.Įxamples of Matching Principle Depreciation By adhering to this principle, you will get a more accurate picture of your business' profitability and make your financial statements more comparable to tother businesses in your industry.The Matching Principle is an important accounting concept which states that revenues and expenses are recorded in the Income Statement on the same accounting period in which they occurred. In conclusion, the matching principle is an important part of accounting that all business owners should be aware of. This is because businesses generally follow the same accounting practices with regard to expense and revenue recognition. Second, following the matching principle makes businesses' financial statements more comparable to those of other businesses in the same industry. This is especially important for businesses that have seasonal fluctuations in sales or income. First, by recording expenses in the same period they generate revenue, you will get a more accurate picture of your business' true profitability. There are a few reasons why the matching principle is so important. This could be today, tomorrow, a month or months from now depending on your type of business and how quickly you are turning inventory into sales. Instead, you would expense it when you actually sell the inventory and recognize revenue from it. Under the matching principle, you would not record the cost of the inventory as an expense in January. Simply put, the matching principle requires a businesses expense items are recorded in the same period they generate revenue.įor example, let's say your company purchases inventory in January with the intention of selling it later in the year.

In particular, you should make sure you understand and are complying with the matching principle. One way to do that is by paying close attention to your accounting practices. As a business owner, you're always looking for ways to improve your bottom line.

Matching principle of accounting