According to the matching principle, the expenses which are incurred to earn revenue shall be recorded within the same accounting period during which such revenue is recognized and not within the next or previous accounting period.
Examples of Matching Principle Accounting
Sales worth Rs 5,00,000 is formed in 2012. Total Inventory worth Rs 2,50,000 was purchased, of which Rs 50,000 remained in hand at the top of 2012. Rs 2,00,000 [i.e. Rs 2,50,000 minus Rs 50,000] is the cost of earning revenue worth Rs 5,00,000 and this 2,00,000 shall be recorded in 2012 resulting in gross profit of Rs 3,00,000.
A Law Firm pays Rs 50,000 per month as salary to each of the 4 lawyers employed by it. Rs 2,00,000 worth of monthly salaries must be matched with the revenue generated say Rs 4,00,000.
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According to The American Institute of Certified Public Accountants “Principles of Accounting are the overall law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”
After going through this lesson, you will be ready to understand the ‘Basic Accounting Terms’ that we commonly use in Accountancy.
After browsing this lesson, you shall be ready to understand the subsequent Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual