Matching principle accounting example8/19/2023 Using both accounting concepts ensures a more balanced sense of your net income, or the money you have left after deducting expenses. Together, the revenue recognition principle and the matching principle make up the core pillars of accrual accounting: You recognize incoming revenue and match it with associated expenses. The matching principle states that you must record expenses associated with any revenue for the same time period, regardless of whether that money has been paid out. This balance of money due is called the accounts receivable money. Even though you don't yet have the money from that customer, you recognize that the revenue from this sale is imminent. You can note, for example, the money you'll receive from a large sale of goods to a customer while you're still filling the order. The revenue recognition principle, another pillar of accrual accounting, states that a business records revenue when earned, not when that money is paid. What Is the Difference Between the Matching Principle and the Revenue Recognition Principle? The biggest key to any accounting system is consistency and accuracy in reporting, so once you choose an accounting system, just make sure you stick with it. The matching principle simply states that related revenue and expenses should be recorded together to reflect the direct correlation between money in and money out.Īn alternate accounting system is called cash accounting or cash-basis accounting, which states that you should record your business's revenue and expenses at the time of payment when cash changes hands.Įither of these accounting systems can prove a good fit for your business, and either will help you generate accurate and up-to-date cash flow statements. The accrual method of business accounting is an accounting system where your business's revenue and expenses are recorded when each takes place, rather than when actual payment is made or received. These principles encompass all approved standard accounting methods and processes. This is why the matching principle and the accrual basis of accounting are part of the Generally Accepted Accounting Principles (GAAP). If you don't account for your expenses with your revenue, you run the risk of assuming you have more money than you actually do.īusinesses operating under a false assumption of how much money they have tend to run up debt, which can be a quick way to see your business fail. 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. 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. By accounting for the expense at the time that it's incurred and not when it's paid, you have a more up-to-date picture of your business's financial situation because you're already setting aside the money you'll be spending to cover expenses.įor anyone who's ever balanced a checkbook for their personal finances, the idea behind the matching principle may seem easy and obvious. The matching concept ensures that you record both revenue and any related accrued expenses together. Accrual accounting dictates that these related revenues and expenses are recorded when they take place, rather than when money changes hands.Įxpenses noted but not yet paid are called accrued expenses. The matching principle is a key element of the accrual basis of accounting and adjusting entries, in which a business matches expenses with its related revenues for a given accounting period. In this guide, we'll unpack the matching principle concept, its benefits, and give you some concrete examples so you can decide if it's right for you and your small business. Many people who own small businesses find using the matching principle to be an easy way to keep track of their finances through Skynova's accounting software. Using it is like balancing your checkbook every time you make a deposit or write a check to pay for an expense. The matching principle is part of the accrual-basis accounting system, establishing a cause-and-effect relationship between revenue and expenses. But what accounting system is best for your business? Implementing effective methods for recording what money is coming in and going out lets you keep a finger on the pulse of your financial health. When it comes to running a small business, few things are as important (or potentially as frustrating) as keeping accurate financial records. Home Learn Accounting Is the Matching Principle Right for Your Small Business?
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