What is the principle of matching in accounting?

The matching principle is an accounting concept that dictates that companies report expenses at the same time as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of time (e.g., a year, quarter, or month).

What is the matching expense recognition principle?

The expense recognition principle is a fundamental principle of accounting that business expenses should be recognized in the same period as the revenues associated with those expenses (and vice versa). This is also called the matching principle and is the most basic tenet of accrual accounting.

Is prepaid expense matched with revenue?

Both the original cost of the asset and its useful life. 22. A prepaid expense can best be described as an amount a. paid and currently matched with revenues.

How the matching principle is related to accrual accounting?

Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs versus when payment is received or made. The method follows the matching principle, which says that revenues and expenses should be recognized in the same period.

What is the goal of the matching principle?

The matching principle is an accounting guideline which aims to match expenses with associated revenues for the period. The principle states that a company’s income statement will reflect not only the revenue for the period reported but also the costs associated with those revenues.

What is matching principle example?

For example, if a business pays a 10% commission to sales representatives at the end of each month. If the company has $50,000 in sales in the month of December, the company will pay the commission of $5,000 next January. Some businesses follow the matching principle.

How do you use the matching principle?

The matching principle requires that revenues and any related expenses be recognized together in the same reporting period. Thus, if there is a cause-and-effect relationship between revenue and certain expenses, then record them at the same time.

How does prepaid expenses affect balance sheet?

Prepaid expenses are future expenses that are paid in advance. On the balance sheet, prepaid expenses are first recorded as an asset. After the benefits of the assets are realized over time, the amount is then recorded as an expense.

How is prepayment treated in accounting?

From the perspective of the buyer, a prepayment is recorded as a debit to the prepaid expenses account and a credit to the cash account. When the prepaid item is eventually consumed, a relevant expense account is debited and the prepaid expenses account is credited.