The accrual method does provide a more accurate picture of the company’s current condition, but its relative complexity makes it more expensive to implement. An accrued expense is recognized on the books before it has been billed or paid. Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes. Recognizing the expenses at the wrong time may distort the financial statements greatly and provide an inaccurate financial position of the business. If you do not use the matching principle, then you are using the cash method of accounting, where revenue is recorded when cash is received and expenses when they are paid. The matching principle is one of the ten accounting principles included in Generally Accepted Accounting Principles, stating that businesses are required to match income to related expenses in a specific period of time. In this case, you still recognize the revenue of $7500 each month using an accounts receivable journal entry and then later move the revenue to your cash account when you receive the payments. Your company offers a discount to clients that pay their bill annually instead of monthly. An adjusting journal entry occurs at the end of a reporting period to record any unrecognized income or expenses for the period.įirst, the two transactions occurred over three years in reality, but both are used in the same middle year for the income statement. This matches costs to sales and therefore gives a more accurate representation of the business, but results in a temporary discrepancy between profit/loss and the cash position of the business. The Matching Principle Is A Key Component In Accrual Accountingĭepreciation is used to distribute the cost of the asset over its expected life span according to the matching principle.
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