MATCHING PRINCIPLEDEFINITION:

Matching principle states that expenses incurred by an organization must be charged to the

income statement in the accounting period in which the revenue, to which those expenses

relate, is earned.

EXPLANATION:

The matching concept is an accounting practice that equalizes revenue against expenses on

the basis of their cause and effect relationship. According to this concept expenses are

recognized in the same accounting period as the related revenues are recognized. The

period’s revenues are reported along with the expenses that brought them.

The matching concept helps to avoid misstating earnings for a period. Reporting revenues

for the period without reporting all the expenses that brought them or just reporting those

expenses could result in overstated or understated profits.

EXAMPLES:

Deferred taxation: IAS 12 Income Taxes and FAS 109 Accounting for Income Taxes

require the accounting for taxable and deductible temporary differences arising in the

calculation of income in a manner that results in the matching of tax expense with the

accounting profit earned during a period.

Wages: The pay period for hourly employees ends on March 28, but employees continue to

earn wages through March 31, which are paid to them on April 4. The employer should

record an expense in March for those wages earned from March 29 to March 31.

ACCRUAL BASIS OF ACCOUNTING

DEFINITION:

Accrual basis of accounting requires that income and expense must be recognized in the

accounting period to which they relate rather than on cash basis.

EXPLANATION:

Under the accrual method, transactions are counted when the order is made, the item is

delivered, or the services occur, regardless of when the money for them (receivables) is

actually received or paid. In other words, income is counted when the sale occurs, and

expenses are counted when you receive the goods or services. You don't have to wait until

you see the money, or actually pay money out of your checking account, to record a

transaction.

EXAMPLES:

Accrued income: A computer installation business finishes a job in November, and doesn't

get paid until three months later in January. Under the accrual method, the business would

record the income in its November books.

Accrued expense: A company purchased a new laser printer on credit in May and paid

$1,000 for it in July, two months later. Under the accrual method, the company would

record the $1,000 payment in May, when it took the laser printer and became obligated to

pay for it.