![]() GAAP allows the readers of the financial statements to review meaningful and comparable information. When revenue is matched to expenses properly, it is useful to managers, investors and bankers to make important decisions. Since the equipment will be used to produce income over 5 years, the depreciation expense is matched properly. It could charge the cost of the equipment to depreciation expense at the rate of $10,000 per year for 5 years. There could be a situation where salary is paid in the current period, but the cash for revenue is not collected until the next period.Īnother example of the matching principle is when a corporation buys equipment for $50,000 that has a projected life of 5 years. For example, using the previous scenario, revenue would only be recorded when the cash is received. In accrual accounting, the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned and is associated with accrual accounting and the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the trans. Alternatively, under the cash basis of accounting, revenues are recorded when cash is received and when expenses are paid. ![]() If the salary was not paid until after the current period, then there would be an accrual set up for wages payable as a liability. Under the matching principle, the salary expense for the related consulting services would be recorded in the same period. I wrote a short description for each as well as an explanation on how they relate to financial accounting. For example, if a corporation is providing consulting services, we have determined from the revenue recognition principle that revenue is recorded when the work is performed. Here’s a list of more than 5 basic accounting principles that make up GAAP in the United States. Under the accrual basis of accounting, revenues are recorded in the same period as when the expenses are incurred. GAAP is basically the rule book that accountants follow when preparing financial statements. The matching principle is one of the Generally Accepted Accounting Principles (GAAP).
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