Accrual accounting is the system by which you recognize your expenses when you become liable for them, that is, when they are incurred. As matched expenses and revenues work under the basic equation of the “Income Statement”: Net profits earned = Generated revenues – Incurred expenses. In practice, matching is a combination of accrual accounting and the revenue recognition principle. Accrual Accounting’s Value with the Profit and Loss Statement. Though matching and accrual-based accounting sound similar, the matching concept is better than the accrual basis. If for instance the company paid the bonus in the month of may which falls in the second quarter of the year, the matching concept requires the company to record this expense in the first quarter and not in the second quarter, because this expense relates the revenues generated in the first quarter. And 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. The matching principle states that an expense must be recorded in the same accounting period in which it was used to produce revenue. Hence, if a company purchases an elaborate office system for $252,000 that will be useful for 84 months, the company should report $3,000 of depreciation expense on each of its monthly income statements. So if the company has been operating under “cash based accounting”, they may have recorded the expense in the month of February, as it has actually paid cash in February. One recognizes revenues and expenses under accrual-based accounting at the time of the event irrespective of the cash inflows or outflows. Accrual accounting is based on the matching principle, which defines how and when businesses adjust the balance sheet. The accrual accounting method, for example, is based on this principle since it records financial transactions as they occur, rather than when cash changes hands. The principle states you should match the timing of the expenses of creating and delivering your product or service with the timing of getting revenue from the sale. The matching principle is not used in cash accounting, wherein revenues and expenses are only recorded when cash changes hands. An expense is the outflow or using up of assets in the generation of revenue. Period costs do not have corresponding revenues. Matching principle is an important concept of accrual accounting which states that the revenues and related expenses must be matched in the same period to which they relate. Save my name, email, and website in this browser for the next time I comment. The matching principle requires that revenues and any related expenses be recognized together in the same reporting period. This principle recognizes that businesses must incur expenses to earn revenues. Accrual accounting places this information on the balance sheet so the owner can fully grasp his financial position and make better decisions. Likewise, you recognize income when you earn it. If an expense is not directly tied to revenues, the expense should be reported on the income statement in the accounting period in which it expires or is used up. In either case, recognition does not wait upon the payment or receipt of cash. If you do not use the matching principle, then you are using the cash method of accounting, where revenue is recorded when cash is received and expenses when they are paid. In this case study, the work was completed in July. If there is no cause-and-effect relationship leading to future related revenue, then the expenses can be recorded immediately without adjusting entries. 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