Matching Concept in Accounting: Benefits and Challenges

Matching Concept in Accounting: Benefits and Challenges

The matching concept in accounting is an accounting principle that governs how revenues and expenses are recorded.

 It necessitates that a company keeps track of its expenses as well as its revenues. They should both fall within the same time frame for the best tracking. 

This principle acknowledges that businesses must incur expenses to generate revenues

The principle is central to accrual accounting and adjusting entries. 

It is included in the Generally Accepted Accounting Principles (GAAP). 

The accounting matching principle is founded on the cause-and-effect relationship. 

If there is no cause-and-effect relationship, the accountant will immediately charge the cost to the expense.

In the concept of accrual accounting, the accounting matching principle is especially important. 

According to the matching concept in accounting, businesses should match related revenues and expenses in the same period. 

They do this to link an asset's or revenue's costs to its benefits.

Example Accounting matching principle

Owing to what is the matching concept in accounting, the expense must be related to the period in which the expense occurs rather than the period in which invoices are paid. 

For instance, suppose a company pays a 10% commission to sales representatives at the end of each month. 

If the company makes $50,000 in sales in December, the $5,000 commission will be paid in January of the following year.

Some companies adhere to the accounting matching principle

Commission expenses are reported on the December income statement by these companies. 

Other businesses account on a cash basis. Because January is the payment month, they report the commission in January. 

The alternative is to report the expense in December when it was incurred.

Aside from commissions, here are some other examples of matching concepts in accountings:

  • Depreciation
  • Wages
  • Employee incentives

What Exactly Is the Revenue Recognition Principle?

Another accounting principle related to the matching concept in accounting is the revenue recognition principle. 

It is necessary to report revenue and record it during realization and earning. 

This occurs irrespective of when they make a payment. 

In other words, businesses do not have to wait for cash from customers before recording sales revenue.

For example, if you work as a roofing contractor and complete a job for a customer, your company has earned the fees. 

This is true regardless of when the customer pays you.

What Are the Advantages of the Matching concept in accounting?

Businesses primarily use the matching concept in accounting to ensure financial statement consistency. 

For instance, the income statement, balance sheet, and so on.

Recognizing expenses at the incorrect time can greatly distort the financial statements. 

A company's financial position may become inaccurate as a result. 

The matching concept in accounting assists businesses in avoiding overstating profits for a given period.

For example, recognising expenses earlier than necessary results in lower net income. 

Recognizing an expense later may result in a higher net income than is the case.

Certain financial aspects of business also benefit from the matching concept in accounting. 

Long-term investments depreciate. 

The matching concept in accounting allows for the distribution and matching of an asset throughout its useful life to balance the cost over time.

A piece of specialized equipment, for example, may cost $25,000. 

It may last ten or more years, allowing businesses to spread the cost over ten years rather than a single year.

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What are the Difficulties of the Matching concept in accounting?

This principle is an effective tool when expenses and revenues are clearly defined. 

However, expenses may apply to multiple areas of revenue or vice versa. 

Account teams must make estimates when there is no clear correlation between expenses and revenues. You could, for example, buy office supplies such as pens, notebooks, and printer ink for your team. 

These items are necessary, but they may not be revenue-generating.

On a larger scale, consider buying a new building for your company. 

No way of knowing whether a larger space or a better location increases revenue exists. 

Are workers more productive? 

Is it easier for customers to find your company? 

There is no direct relationship between these factors and the construction of a new building. 

As a result, businesses frequently choose to spread the cost of construction over years or decades.

For example, suppose a company invests $20 million in a new location with the expectation that it will last for ten years. 

The company then distributes the $20 million in expenses over ten years. 

If there is a loan, the expense may include any fees and interest charges incurred during the term of the loan. 

This payment is made even if the company spends the entire $20 million upfront.

Online search ads are another example. 

A marketing team creates messages to entice customers to visit a company's website. 

The customer may only purchase for a few weeks, months, or years. 

They did, however, plant a seed. 

In these cases, it is only sometimes possible to directly correlate revenue to spend. Rather than being spread out over time, expenses for online search ads appear in the expense period.

FAQs

1. What is the Accounting Matching Concept?

Let us define period costs and product costs to explain the matching concept further.

Period costs are expenses that are not directly related to the product, such as commissions, office supplies, or rent. 

They are only mentioned when they occur in the statement. 

Expenses must be documented in the timeframe of their occurrence rather than when the amount is paid according to the accounting matching concept. 

Product costs are related to the expenses incurred in the production of the cost. 

The accrual or matching concept in accounting instructs us to calculate the cost of producing the commodity concurrently with the revenue associated with the sold commodities. 

As an example, if a salesperson sells 200 copies of a book in January, the cost price of those 200 copies must be matched with the income for January to calculate the profit or loss.

2. What is the benefit of a matching concept in accounting, and which principle appeals to you more, accrual or matching concept?

In accrual accounting, the matching concept in accounting is used. 

It is classified as accrual accounting. 

Accrual accounting is the process of matching revenues and expenditures over time. 

As a result, the matching concept in accounting cannot be preferred over accrual accounting. 

They both complement and complete one another.

The following are the benefits of adhering to the matching concept in accounting:

Equality in Resource Distribution: The principles allow for an equal distribution of company assets based on the demand of balancing costs and revenues within the same timeframe. 

As a result, depreciation is easily avoided.

Accurate Reporting: This ensures the accuracy of accounting for expenditure and income. The Clarity of the Company's Finances: By operating under the matching concept in accounting, investors and stakeholders gain the most accurate picture of the company's profits and losses.

The matching concept in accounting has several drawbacks, one of which is that estimation cannot be used. 

However, the benefits of the principle outweigh the disadvantages, which can be overcome with a little common sense.

3. What is required for the matching concept?

Estimates must be used to allocate expenses for variable costs such as warranties or allocations based on the useful lives of machinery under the matching concept. 

It also necessitates accurate data on the costs of production or service provision for service-based businesses.

4. What is the matching concept in accounting's goal?

The matching concept in accounting seeks to allocate the costs of generating revenue to the same period in which the revenue will be collected. 

Matching costs to revenue aids in determining a company's profitability.

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