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THE MATCHING PRINCIPLE

Works Cited

By William L. and Edwin T.

Adjustments con't

Syme, George and Ireland, Tim. Accounting 1: Sixth Edition. Toronto: Pearson Education 2002. Print.

"Matching Principle" AccountingCoach. Copyright 2013 AccountingCoach LLC. Web. 25 May 2013 <http://www.accountingcoach.com/terms/M/matching-principle.html>

At the end of the period, the adjustment for

supplies, as well as supplies expense, must be

performed.

Why? This is because the supplies are used to

generate revenue, and by using up supplies, you

incur a supplies expense, that helped produce the

revenue in the same period.

This is the basis of the Matching Principle.

Where is the Matching Principle Used?

The Supplies Example: Continued

Supplies Expense

The Matching Principle is used for adjusting entries

We do adjusting entries because the financial records

are allowed to become inaccurate between periods.

If the Matching Principle is not complied with at the

end of a fiscal period, the net income/loss may be

over/understated, which results in the financial

statement becoming inaccurate for the period.

Supplies

$5000

Beginning balance

$6000

$5000

Amount of expense incurred

(Supplies are used up)

Supplies Balance at Period End

$1000

What is the Matching Principle?

The Definition:

The matching principle states that each expense item related to revenue earned must be recorded in the same period as the revenue it helped earn.

The supplies expense (an Expense) is incurred throughout

the period, as the supplies are used up to generate Revenue.

Therefore, the Matching Principle states that we must

record an accurate value for the Supplies Expense at the end of the period (the Adjustment)

Matching Principle and Adjustments

What other concepts do we

need to understand the

Matching Principle?

Time Period Concept

States that all accounting will take place over specific time periods, known as fiscal periods.

Relating this to the Matching Principle: Revenues and the expenses that were incurred to produce this revenue are recorded in the same period

To understand this principle, we must first understand:

The Time Period Concept

and

The Revenue Recognition Principle

The Matching Principle is complied with when

performing adjusting entries (such as for prepaid

expenses and amortization).

For example, when supplies are used up through a

period, the supplies expense is being incurred.

However, this is not updated until the end of the

period.

The Revenue Recognition Principle:

Revenue is recorded at the time

the transaction is completed;

it is recorded when it is earned,

not necessarily when cash is received

Therefore, when revenue is earned, it must be recorded in its proper period, in accordance with the Matching Principle.

What does it actually mean?

The matching principle means that every revenue and expense transaction in the same period must be recorded together.

Matching Principle Timeline

Example:

Expense is incurred on December 26, 2006,

but cash is paid on January 26, 2007

(Period ends December 31, 2006)

Matching Principle:

Expense is recorded at the end of 2006, even when bill is received in the next period.

2006

2008

2007

1999

If Expenses are incurred in between periods, a portion of the Expense is allocated to each period, as this Expense helped produce revenue in both periods.

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