The matching concept in accounting matches revenues with expenses incurred to create them, preventing misrepresentation of gains or losses. Accrual accounting supports this by recognizing debts even if they have not been paid. Generally accepted accounting principles are established by national and international organizations.
The matching concept is a business accounting practice that matches revenues with expenses incurred to create them. When using the matching concept, a company recognizes income and its related expenses in the same accounting period, regardless of whether or not they occurred in the same period. This practice prevents companies from misrepresenting their gains or losses in a given period of time.
Many companies use a quarterly accounting system in which an accounting period corresponds to a fiscal quarter. Four quarters make up a fiscal year or an annual accounting period. At the end of each accounting period, companies release various accounting reports. This usually includes a statement of changes in financial position, a statement of retained earnings and an income statement. These statements help owners and investors assess the company’s financial health.
The concept of matching is just one of several generally accepted accounting principles that help ensure that these reports are as accurate as possible. Without it, companies may issue an inflated income statement because the expenses related to bringing a particular product to market have not yet been factored in. This can result in an artificial sense of company value, which can affect stock and investment options.
Accrual accounting is another generally accepted accounting practice that is often used to support the matching concept. When using accrual accounting, a business accounts for cash received as soon as it is earned and lost as soon as it is due. If a company knows that it will cost a certain amount to pay its employees, for example, that money is considered an expense as soon as the employee works, rather than on the second Friday of the month when wages are due.
Accrual accounting supports the concept of matching by forcing the company to recognize debts even if they have not been paid. However, it also allows money to be accounted for as an asset, even if the customer has not yet paid it to the business. It is used by most companies across the world.
Generally accepted accounting principles, such as the correspondence concept and accrual accounting, consist of rules established by national and international organizations and less formal conventions recognized by the accounting industry. International standards are set by the International Accounting Standards Board of the International Financial Reporting Standards Foundation. Individual countries have their own councils and organizations that set standards within each country. While some of these standards are matters of convention, many have also been codified into law.
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