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