In the conceptual framework for financial reporting there are three levels of financial accounting: 1.) objectives 2.) fundamental concepts and 3.) recognition and measurements. This blog will focus on the third level, specifically the matching principle under the basic principles of the accounting umbrella.
What is the matching principle?
When recognizing expenses, the matching principle’s approach is to “let the expenses follow the revenue.” This means that the expenses need to be recorded when the product or service contributes to the revenue. The matching principle can also be defined as expenses to be matched with the revenue whenever it is logical and feasible to do so. For example, a consulting company has a contract with a customer to have one of their employees do consulting work in March. The revenue is recognized in March; therefore that employee’s wages also need to be recorded in March.
The matching principle generally has costs classified under two groups, period costs and product costs. To learn more about these costs, please read the “Period Costs vs. Product Costs” blog.
Why is the matching principle important?
This principle is important for businesses to follow because the Financial Accounting Standards Board issued six Statements of Financial Accounting Concepts that connect to financial reporting for business ventures. Of those six statements, one statement lays out basic acknowledgment and measurement criteria and guidance on what information should be formally included into their financial statements and when.
By following the matching principle, businesses will be following the standard framework set forth by the standards board, causing a better understanding of the business’ reliable financial statements. To learn more, contact TGG Accounting. We can help implement Best Practices in your accounting department.Written by: Erika Marasigan TGG Accounting