The matching principle, which is based on the cause-and-effect relationship between spending and earning, is part of the Generally Accepted Accounting Principles (GAAP). It mandates that all business expenses be recorded in the same period as related revenues. In other words, it formally recognizes that businesses must spend money to generate revenue.
Accrual accounting is founded on the matching principle, which governs how and when companies adjust their balance sheet. If there is no cause-and-effect relationship leading to future related revenue, the expenses can be recorded immediately without the need for adjusting entries.
GAAP VS IFRS
The primary distinction between the two systems is that GAAP is a rules-based system, whereas IFRS is a principles-based system. This schism is manifested in specific details and interpretations. Essentially, IFRS guidelines provide far less overall detail than GAAP guidelines. As a result, the IFRS theoretical framework and principles leave more room for interpretation and may frequently necessitate lengthy disclosures on financial statements. 10 The consistent and intuitive principles of IFRS, on the other hand, are more logically sound and may better represent the economics of business transactions.
- GAAP is a set of commonly accepted accounting principles, standards, and procedures that businesses and their accountants must adhere to when compiling financial statements.
- The International Financial Reporting Standards (IFRS) are international accounting standards that specify how specific types of transactions and other events should be reported in financial statements.
- According to some accountants, the primary distinction between the two systems is methodology; GAAP is rules-based, whereas IFRS is principles-based.
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HOW ACCOUNTING MATCHING PRINCIPLE AFFECT ACCOUNTS IN BALANCE SHEET AND INCOME STATEMENT
According to the matching principle, a firm must record a cost on its income statement in the same period that the associated revenues are generated. It also causes a liability to appear on the balance sheet after the accounting period.
Let’s imagine that sales are produced entirely through sales representatives (reps) who receive a 10 percent commission to demonstrate the matching principle. The commissions are paid on the 15th day of the month following the calendar month of the sales. For instance, if the firm has $60,000 of sales in December, the corporation will pay commissions of $6,000 on January 15.
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The matching principle mandates that $6,000 of commissions expenditure be recorded on the December income statement together with the associated December sales of $60,000. It also mandates that the December 31 balance sheet reflects a current liability of $6,000. This is referred to as an accrual and is done by an adjustment entry dated December 31 that debits Commissions Expense for $6,000 and credits Commissions Payable for $6,000. (Without the matching principle and the adjusting entry, the firm may report the $6,000 of commissions expense in January rather than in December when the expense and the obligation were incurred.) check more from source