1.
Definition
Matching Principle requires 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.
Prior to the application of the matching principle, expenses were charged
to the income statement in the accounting period in which they were paid
irrespective of whether they relate to the revenue earned during that period.
This resulted in non recognition of expenses incurred but not paid for during
an accounting period (i.e. accrued expenses) and the charge to income statement
of expenses paid in respect of future periods (i.e. prepaid expenses).
Application of matching principle results in the deferral of prepaid expenses
in order to match them with the revenue earned in future periods. Similarly,
accrued expenses are charged in the income statement in which they are incurred
to match them with the current period's revenue.
A major development from the application of matching principle is the use
of depreciation in the accounting for non-current assets. Depreciation results
in a systematic charge of the cost of a fixed asset to the income statement
over several accounting periods spanning the asset's useful life during which
it is expected to generate economic benefits for the entity. Depreciation
ensures that the cost of fixed assets is not charged to the profit & loss
at once but is 'matched' against economic benefits (revenue or cost savings)
earned from the asset's use over several accounting periods.
Matching principle therefore results in the presentation of a more
balanced and consistent view of the financial performance of an organization
than would result from the use of cash basis of accounting.
Examples of the use of matching principle in IFRS and GAAP include the
following:
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 tax in a manner that results in the matching of tax expense with the accounting profit earned during a period.
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 tax in a manner that results in the matching of tax expense with the accounting profit earned during a period.
Cost of Goods Sold
The cost incurred in the manufacture or procurement of inventory is charged to the income statement of the accounting period in which the inventory is sold. Therefore, any inventory remaining unsold at the end of an accounting period is excluded from the computation of cost of goods sold.
The cost incurred in the manufacture or procurement of inventory is charged to the income statement of the accounting period in which the inventory is sold. Therefore, any inventory remaining unsold at the end of an accounting period is excluded from the computation of cost of goods sold.
Government Grants
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance requires the recognition of grants as income over the accounting periods in which the related costs (that were intended to be compensated by the grant) are incurred by the entity.
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance requires the recognition of grants as income over the accounting periods in which the related costs (that were intended to be compensated by the grant) are incurred by the entity.
In the accounting community, the expressions 'matching principle' and
'accruals basis of accounting' are often used interchangeably. Accruals basis
of accounting requires recognition of income and expenses in the accounting
periods to which they relate rather than on cash basis. Accruals basis of
accounting is therefore similar to the matching principle in that both tend to
dissolve the use of cash basis of accounting.
However, the matching principle is a further refinement of the accruals
concept. For example, accruals basis of accounting requires the recognition of
the estimated tax expense in the current accounting period even though the
actual settlement of the provision may occur in the subsequent period. However,
matching principle would also necessitate the recognition of deferred tax in
the accounting periods in which the temporary differences arise so as to
'match' the accounting profits with the tax charge recognized in the accounting
period to the extent of the temporary differences.
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