Overview
The matching concept, inherent to the accrual basis of accounting, necessitates that expenses be recorded at the same time as the revenues they help generate. This principle ensures the accurate representation of a company’s profit or loss within a specific accounting period.
Examples
Example 1: Wages Expense
An employee works from December 20 to December 31 but is paid in January. Under the matching concept, the wages expense would be recorded in December, the period in which the employee worked.
Example 2: Depreciation
A business purchases machinery for $50,000, expected to last 10 years. Instead of recording the entire cost in the purchase year, depreciation spreads this expense over its useful life, ensuring each income statement reflects the portion of the asset used for revenue generation.
Example 3: Prepaid Insurance
Imagine a company pays an annual insurance premium of $12,000. Instead of expensing the full amount once paid, it records $1,000 each month, matching the expense with the monthly insured periods.
Frequently Asked Questions
Q: Why is the matching concept important?
A: The matching concept ensures that financial statements accurately reflect the company’s performance by aligning revenues with the expenses incurred to generate those revenues. This results in a more accurate view of profitability and financial health.
Q: How does the matching concept relate to accrued expenses?
A: The matching concept requires accrued expenses to be recorded in the same period as the associated revenues, even if the actual payment occurs later, ensuring expenses are recognized when they are incurred.
Q: Does the matching concept apply to cash basis accounting?
A: No, the matching concept is specific to the accrual basis of accounting where revenues and expenses are recognized when earned or incurred, not when cash is exchanged.
Q: What is an example of a mismatched expense?
A: If a business paid for services in December but didn’t receive those services until January, recording the expense in December would mismatch, as the associated revenue and benefit were received in a different period.
- Accruals Concept: This principle states that transactions should be recorded when they occur rather than when payment is made or received.
- Revenue Recognition Principle: An accounting principle that outlines specific conditions under which revenue is recognized.
- Expense Recognition Principle: This principle, part of the matching concept, dictates when costs are recognized as expenses.
- Deferred Expense: Costs that have been incurred but are not yet recorded as an expense as they relate to future periods.
Online Resources
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Accounting” by Robert Libby, Patricia Libby, and Frank Hodge
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
Accounting Basics: “Matching Concept” Fundamentals Quiz
### What is the main purpose of the matching concept?
- [x] To ensure expenses are matched with the revenues they generate
- [ ] To record all expenses when cash is paid
- [ ] To defer recognition of all expenses
- [ ] To match cash inflows with cash outflows
> **Explanation:** The main purpose of the matching concept is to match expenses with the revenues they generate to accurately reflect the financial performance within an accounting period.
### Which basis of accounting incorporates the matching concept?
- [ ] Cash Basis
- [x] Accrual Basis
- [ ] Hybrid Basis
- [ ] Modified Cash Basis
> **Explanation:** The matching concept is a key component of accrual basis accounting, which recognizes revenues and expenses when they are incurred, not necessarily when cash is exchanged.
### How is depreciation an example of the matching concept?
- [ ] Depreciation is recorded only when the asset is sold
- [ ] Depreciation matches costs between competitors
- [x] Depreciation expenses are spread over the useful life of an asset
- [ ] Depreciation is recorded as accumulated value
> **Explanation:** Depreciation spreads the expense of an asset over its useful life, ensuring that the expense is matched with the revenue generated by the asset in each period.
### In what period should revenue be recognized according to the matching concept?
- [x] In the period when it is earned
- [ ] When cash is received
- [ ] When the corresponding expenses are paid
- [ ] When financial statements are prepared
> **Explanation:** According to the matching concept, revenue should be recognized in the period when it is earned, aligning it with the expenses incurred to generate that revenue.
### Why might prepaid insurance be considered under the matching concept?
- [x] Because it allocates the insurance expense over the period benefitted
- [ ] Because it provides for cash basis accounting
- [ ] Because it accrues at the end of the financial year
- [ ] Because it matches expenses once a year
> **Explanation:** Prepaid insurance is considered under the matching concept because it allocates the insurance expense over the period the coverage applies, matching the usage period with the expense recognition.
### Which concept requires accrued expenses to be recorded in the related period?
- [ ] Market Value Concept
- [ ] Cash Flow Concept
- [x] Matching Concept
- [ ] Cost Principle
> **Explanation:** The matching concept requires accrued expenses to be recorded in the period in which they are incurred, not necessarily when they are paid.
### What principle states that expenses should be recorded at the same time as the revenues they help generate?
- [x] Matching Principle
- [ ] Realization Principle
- [ ] Consistency Principle
- [ ] Cash Flow Principle
> **Explanation:** The matching principle dictates that expenses should be recorded during the same period as the revenues they help generate, ensuring accurate financial accounting.
### Why doesn’t the matching concept apply to the cash basis of accounting?
- [ ] Because it is only applicable to expenses
- [ ] Because cash basis does not record expenses when incurred
- [ ] Because cash basis ignores revenue
- [x] Because cash basis records transactions when cash is exchanged
> **Explanation:** The matching concept does not apply to the cash basis of accounting because cash basis records transactions when cash is exchanged, whereas matching concept requires alignment of expenses with revenues.
### Which of the following is an example of improper use of the matching concept?
- [ ] Recording depreciation annually
- [ ] Acknowledging revenue upon delivery
- [ ] Aligning expenses with corresponding revenue
- [x] Recording all expenses when cash is paid
> **Explanation:** Recording all expenses when cash is paid is improper under the matching concept, which requires expenses to be matched with corresponding revenue regardless of cash flow timing.
### What accounting principle ensures expenses are recognized in the period when they help generate revenues?
- [ ] Disclosure Principle
- [ ] Realization Principle
- [ ] Cost Principle
- [x] Matching Principle
> **Explanation:** The matching principle ensures that expenses are recognized in the period when they help generate revenues, ensuring accurate financial reporting and performance measurement.
Thank you for exploring the principles of accounting with our detailed entry on the matching concept and tackling these challenging quiz questions. Keep advancing your financial acumen!
