Only the accrual accounting method is able to use the matching principle, since cash accounting does not use the revenue recognition principle that accrual accounting uses. Recognizing expenses at the wrong time may distort the financial statements greatly. A business may end up with an inaccurate financial position of its finances.
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You see what money you’re putting in and what money will be taken out when the checks you write are cashed. When a check is actually debited from your account, for instance, you’ve already accounted for that transaction; thus, you’re not left with less money than you thought. For anyone who’s ever balanced a checkbook for their personal finances, the idea behind the matching principle may seem easy and obvious. But when you’re running a small business, it’s quite easy to lose track of how much money you’ve spent versus how much you’ve made. Using the matching principle for your small business accounting reflects the real-world fact that your business doesn’t just make money — it also spends it.
Is the Matching Principle Right for Your Small Business?
The GASB was established in 1984 as a policy board charged with creating GAAP for state and local government organizations. Many groups rely on government gaap matching principle financial statements, including constituents and lawmakers. Financial statements must be prepared in a way that follows and meets GAAP standards.
Why the Matching Principle is Important for Small Businesses
Thus, the machine is depreciated over its 10-year useful life instead of being fully expensed in 2015. In order to use the matching principle properly, you will need to record a monthly depreciation expense in the amount of $450 for the next three years, or over the useful life of the equipment. Depreciation expense reduces income for each period that the expense is recorded.
Governmental Accounting Standards Board
With the ability to portray a company’s fiscal standing in a favorable light, investors could be easily misled. Regulators know how tempting it is for companies to push the limits on what qualifies as revenue, especially when not all revenue is collected when the work is complete. For example, attorneys charge their clients in billable hours and present the invoice after work is completed. Construction managers often bill clients on a percentage-of-completion method. Accountants must, to the best of their abilities, fully and clearly disclose all the available financial data of the company.
What Is IFRS?
- But with proper matching, managers can correctly assess performance trends over time.
- Comparing financial statements across different companies—even within the same industry—becomes challenging without GAAP.
- For example, if a company makes a sale in December but does not collect payment until January, the revenue is still recorded in December under the matching principle.
- Thank you for reading this guide to understanding the accounting concept of the matching principle.
- So, the expense and the revenue will be booked in September, when the revenue was generated.
- All 50 states follow GAAP, and many local entities, such as counties, cities, towns, and school districts, must adhere to these principles.
- Accrual accounting requires companies to record sales at the time in which they occur.
For example, if you’re a roofing contractor and have completed a job for a customer, your business has earned the fees. One of the most straightforward examples of understanding the matching principle is the concept of depreciation. Still, these are limited situations https://www.bookstime.com/ where it becomes more difficult to use. Overall, it’s a good idea to understand the matching principle for the purpose of day-to-day accounting. To better understand how this concept works in the real world, imagine the following matching principle example.
