Matching Conceptkj

7/29/2019 Matching Conceptkj

1/4

MATCHING CONCEPT

A process in which expenses are

recognised in the income statement on

the basis of a direct association between

the costs incurred and the earning of

specific items of income.

This process involves the simultaneous

or combined recognition of revenues and

expenses that result directly and jointly

from the same transactions or other

events.

This principle dictates that when it isreasonable to do so, expensesshould be

matched with revenues. When expenses

are matched with revenues, they are not

recognized until the associated revenue

is also recognized.

This principle allows greater evaluation

of actual profitability and performance

(shows how much was spent to earn

revenue).

FURTHER DETAILS

Wages paid to manufacturing laborers

are not recognized as expenses until the

actual products are sold. When the

products are sold, the expenses are

recognized as cost of goods sold. Product costs are costs which add value

to inventory. These costs are capitalized

(added) to inventory, and later

expensed as cost of goods sold.

Only if no connection with revenue can


2/4

be established, cost can be charged as

expenses to the current period (e.g.

office salaries and other administrative

expenses). These are period costs which

are costs which are expensed

immediately.

Depreciation is another example of the

matching principle: The cost of

purchasing a fixed asset is spread over

the period in which it is expected to

generate revenue.

ILLUSTRATION NO.1

On March 14, the company received inventory of

$10,000.

On April 13, the vendor is paid in full.

On May 11, the company sold the inventory for

$20,000

Question: When should the inventory become an

expense?

Answer: In the month of May as the inventory was

sold. We have the income of $20,000 which

we need to match it with the cost of $10,000

ILLUSTRATION NO.2

Company A bought a machinery for $36,000. It

expects the machinery to be able to generate incomes

for a period of three (3) years. The company uses thestraight line method for depreciating the machinery.

Question: What should be the annual or monthly

depreciation to be expensed off to match the

generation of income?.

Answer: The company should expensed off $36,000/3


3/4

Matching concept

Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9.Copyright 2011 byMarty J.Schmidt.

The Meaning of Matching Concept

The matching concept is an accounting practice wherebyexpenses arerecognized in the sameaccounting periodwhen the related revenuesarerecognized.

The matching concept thus helps avoid misstating earnings for aperiod. Reporting revenues for a period without reporting the costs

years =$12,000 per annum or $1,000 per

month so as to match against the income.

ILLUSTRATION NO.3

Company A bought a $12,000 yearly motor vehicle

insurance from July 05 to June 06. The company year

end is at 31 st December.

Question: What should the company expense into the

income statement from 1 st January to 31st

December 05 pertaining to this motor

vehicle insurance?

Answer: The company should expense off only halfthe year motor vehicle insurance relating to

the period from July 05 to December 06

namely half of $12,000 = $6,000 into the

income statement. This is because from

January 2006 to June 2006 the motor vehicle

insurance does not relate to the generating of

income for that period.
https://profiles.google.com/113860825673710713224/https://profiles.google.com/113860825673710713224/https://profiles.google.com/113860825673710713224/http://www.solutionmatrix.com/expenses.htmlhttp://www.solutionmatrix.com/expenses.htmlhttp://www.solutionmatrix.com/accounting-period.htmlhttp://www.solutionmatrix.com/accounting-period.htmlhttp://www.solutionmatrix.com/accounting-period.htmlhttp://www.solutionmatrix.com/revenues.htmlhttp://www.solutionmatrix.com/revenues.htmlhttp://www.solutionmatrix.com/revenues.htmlhttp://www.solutionmatrix.com/accounting-period.htmlhttp://www.solutionmatrix.com/expenses.htmlhttps://profiles.google.com/113860825673710713224/


4/4

of producing those revenues, for instance, would result in overstatedprofits.

Applying the matching concept may requireaccrual accounting, thepractice of recognizing revenues when they are earned and expenseswhen they are incurred--not necessarily when cash actually flows in thosetransactions.

In the US, accounting concepts such as the matching concept and accrualaccounting are recognized in the GAAP (Generally Accepted AccountingProcedures) and the organizations behind GAAP (e.g., the Financial

Accounting Standards Board, FASB). Other accounting concepts similarlyrecognized include themateriality concept(the principle that trivial mattersare to be disregarded and all important matters are to be disclosed), and

the historical cost convention (by which transactions are recorded at theprice prevailing when the transaction is made).

The Matching Concept in ROI and Other Financial Metrics

One form of the matching concept plays an important role giving meaningto financial metrics used in business case and investment analyses.Metrics such aspayback period,internal rate of return (IRR), andreturn oninvestment (ROI), for example, compare cash inflows to cash outflows indifferent ways. The comparisonthe resulting financial metrichas

meaning only when the inflows under analysis are broughtby the outflowsin the analysis, and only by those outflows.

In a complex business environment, objectives for such things as salesrevenues, market share, employee productivity, product quality, orcustomer satisfaction, are usually approached through multiple actions andinitiatives. The analyst producing an "ROI" for a specific investment, action,or acquisition, however,must claim that the measured returns are matchedappropriately with (and only with) the costs that brought them. In thecomplex business environment, wise decision makers will test or questionthat claim before trusting the ROI.
http://www.solutionmatrix.com/accrual-accounting.htmlhttp://www.solutionmatrix.com/accrual-accounting.htmlhttp://www.solutionmatrix.com/accrual-accounting.htmlhttp://www.solutionmatrix.com/materiality-concept.htmlhttp://www.solutionmatrix.com/materiality-concept.htmlhttp://www.solutionmatrix.com/materiality-concept.htmlhttp://www.solutionmatrix.com/payback-period.htmlhttp://www.solutionmatrix.com/payback-period.htmlhttp://www.solutionmatrix.com/internal-rate-of-return.htmlhttp://www.solutionmatrix.com/internal-rate-of-return.htmlhttp://www.solutionmatrix.com/internal-rate-of-return.htmlhttp://www.solutionmatrix.com/return-on-investment-definition.htmlhttp://www.solutionmatrix.com/return-on-investment-definition.htmlhttp://www.solutionmatrix.com/return-on-investment-definition.htmlhttp://www.solutionmatrix.com/return-on-investment-definition.htmlhttp://www.solutionmatrix.com/return-on-investment-definition.htmlhttp://www.solutionmatrix.com/return-on-investment-definition.htmlhttp://www.solutionmatrix.com/internal-rate-of-return.htmlhttp://www.solutionmatrix.com/payback-period.htmlhttp://www.solutionmatrix.com/materiality-concept.htmlhttp://www.solutionmatrix.com/accrual-accounting.html

Documents

Matching Conceptkj