![]() On the other hand, if you recognize it too late, this will raise net income. For example, if you recognize an expense too early it reduces net income. This can potentially distort financial statements and give investors an unclear view of the overall financial position. When expenses are recognized too early or late, it can be difficult to see where they result in revenue. Liabilities are recorded on the balance sheet at the end of the accounting period.Įxpenses not directly tied to revenues should be reported on the income statement in the same period as their use. Here’s how it works:Įxpenses are recorded on the income statement in the same period that related revenues are earned. The purpose of the matching principle is to maintain consistency across a business’s income statements and balance sheets. How the matching concept in accounting works If there is no cause-and-effect relationship leading to future related revenue, then the expenses can be recorded immediately without adjusting entries. ![]() ![]() In other words, it formally acknowledges that business must spend money in order to earn revenue.Īccrual accounting is based on the matching principle, which defines how and when businesses adjust the balance sheet. It requires that any business expenses incurred must be recorded in the same period as related revenues. The matching principle is part of the Generally Accepted Accounting Principles (GAAP), based on the cause-and-effect relationship between spending and earning. So, what is the matching principle in accounting, and when is it used? Understanding the matching principle The matching principle offers a way to recognize this idea in accounting. ![]() There’s a common concept in business that you have to spend money to make money. ![]()
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