I have some difficulties in distinguishing these 2 concepts. Would someone be so kind to give me an example that clarifies this. accrual vs. matching principle Thanks
don’t think about it in terms of “vs.” matching means you recognize revenue, and the expenses used to generate that revenue, in the period in which the revenue was earned accrual means how things add up over time before they are used/paid for depending on what you’re talking about eg… salaries accrue even if they aren’t paid out until later… the expense has already occurred, they are just accruing until they are paid off. matching=I might sell you a 1yr magazine subscription which you pay me for in full up front, but since each month I’m only producing 1/12 of the product I promised, each month I only recognize 1/12 of the revenue received, less expenses incurred to produce that issue
i think the relationship is that the matching principle is the foundation of accrual accounting matching- revenues to expenses that created those revenue accrual - interest in bank that you have not received but grows as days go by
@dimes and florin. thanks for the response. another question… what happens if I cannot pay out the salaries?? e.g. I can pay out 10months in year 1, so that I end up paying 14 in year 2. does that mean that under accrual accounting I deduct 12months operating expenses on the income statement even though the some of the cash outflow (14salaries) is in year 2?
barthezz - yes to above. Accounts payable and accrued expenses payable are created by those timing differences. Bonus is a great example. You pay it out in the subsequent year based on the previous years performance. It is accrued and included into the income statement of the year to which it relates. In the next year two of the 14 sakary payements in your example are applied to the liability, and the other 12 are recorded in the inc stmnt of that second year (tho with 2 months of no pay, you my not have empoylees sticking around to the second year)
thanks for the response… so easy but sometimes you need a mentor.
that is the point of accrual - to show your actual expense even if no cash exchange. as said record expense and record an increase in liability- wages payable. when those get paid cash is deducted and wages payable decrease by the same amount
yep that’s right accrual basis is contrasted with cash basis accounting, which is just cash coming in/going out. In accrual you would record 12 months of salary in both years because of the matching principle… you incurred salaries over 12 months to sell your goods/services over that time, so that’s the expense that goes on the income statement. when the payment is actually made, then the salaries payable on the balance sheet will come off.
alright guys - will nail this concept on exam day. 