Revenue Recognition and Matching Principle

Posted: August 26th, 2021

ACC 540 Discussion 5

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ACC 540 Discussion 5

Revenue Recognition and Matching Principle

The revenue recognition and matching principle are fundamental concepts of accounting. The revenue recognition principle, revenues should be recognized and accordingly recorded once it is realized. In this case, it implies that companies should always record revenues in their books(Flood, 2015). They should not wait until it is collected before having it recorded. The concept is critical when it comes to the accrual basis of accounting as it allows recording of revenues before their actual collection. Notably, once a company exchanges goods for cash or other assets, the revenues are realized(Khan & Jain, 2007). For instance, if a business agrees to with their customers to sell an inventory, the revenues are termed to be realizable(Flood, 2015). In this case, therefore, a specific cash amount is noted following the transaction. However, the retailer only earns the revenue after the inventory ownership is transferred to the intended customer.

Subsequently, the matching principle demands that the expenses incurred by a business should be charged on the income statement within the specified period of accounting under which the related revenues are earned. Initially, expenses on the income statement were associated with the period that they were paid without attributing them to the revenues that were earned within the period(Flood, 2015). Hence, this led to a failure to recognize expenses that are incurred yet unpaid for within the accounting period. As such, the expenses charged on the income statement were attributed to the future periods, that is, as prepaid expenses(Khan & Jain, 2007). Therefore, when the matching principle is applied, it leads to the deferral of the prepaid expenses, thereby appropriately matching them with revenues that were earned in the future periods. For example, while accounting for the costs of goods sold, manufacturing or procurement expenses are charged on income statements based on the accounting period under which the inventory was sold. 

References

Flood, J. (2015). Wiley GAAP 2015: Interpretation and Application of Generally Accepted Accounting Principles. Chichester, U.K: Wiley.

Khan, M. & Jain, P. (2007). Management accounting: text, problems, and cases. New Delhi: Tata McGraw-Hill.