The accrual principle is the concept that you should record accounting transactions in the period in which they actually occur, rather than the period in which the cash flows related to them occur. This is in line with the matching principle and reports the depreciation expense in the same period as the revenue to which it is related. What is the Matching Concept in Accounting?ĭepreciation takes a portion of the asset’s cost and records it as an expense for each period you use the asset in order to account for the deterioration in the asset’s value. Generally the cost is allocated as depreciation expense among the periods in which the asset is expected to be used. Depreciation expense affects the values of businesses and entities because the accumulated depreciation disclosed for each asset will reduce its book value on the balance sheet. Depreciation for accounting purposes refers the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching of revenues to expenses principle). This means that the machine will produce products for at least 10 years into the future.ĭepreciation is defined as the expensing of an asset involved in producing revenues throughout its useful life. buys a new piece of equipment for $100,000 in 2015. “Matching” means that firms report revenues and the expenses that brought them in the same period. The matching concept represents the primary differences between accrual accounting and cash basis accounting. Note that applying the matching concept requires accrual accounting, by which companies recognize revenues when they earn them and expenses in the period they incur them.Īctual cash flows from these transactions may occur at other times, even in different periods. These matched costs are expenses of the period.And, this outcome means the auditor finds no problems with matching, materiality, historical costs, or any other GAAP-defined accounting principle. The problem is to determine the costs that match with these revenues. In such situations, we assume that applicable revenues of period have been identified. However, there are occasions when applicable expenses are identified first, and then revenues are matched to them. Then 6000 which is the cost of sales is matched with those revenues and expenses resulting in 1,500 income from the sale. It is first determine when 7,500 is reasonably certain to be realized.
Suppose a goods costing Rs 5,000 are sold for Rs 7,500.
Then cost of items are matched with the revenues.
While applying matching concept, firstly the items of revenues are recognize for the period and their amount. When a transaction or event affects both revenue and expenses, the effect should be recorded in the same accounting year. In order to measure correctly this sale’s net effect on retained earnings in a period, both of these aspects must be recognized in the same accounting period. Expense aspect – It reflects the decrease in retained earnings because the merchandise has left the business.Revenue aspect – It reflects an increase in retained earnings which is equal to the amount of revenue realized.
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