Question

Why is the matching principle important to financial reporting? Can cash accounting follow the matching principle? 250 word explanation please.	0	0

Answer 1

The matching principle mandates that all expenses associated with the revenues of a particular period be shown as expenses during that period itself, whether the expenses are paid or not during that period.

This principle is very important as it enables correct reporting of net income for a period. For instance if a firm pays sales incentives for each month at the beginning of the next month, the matching principle requires that the incentives be shown as expense in the same month in which the sale arises and not in the subsequent month when it is paid. If the sales incentives are, instead, shown as expenses in the month in which they are paid, then they get matched with the sales of an unrelated period and the reported net income will be wrong.

Obviously, only accrual accounting can follow matching principle, as it provides for accounting of revenues when the right to get those revenues are earned, though not received and for the accounting of expenses when the obligation to pay them has arisen, thought not paid. In the example quoted above, only accrual accounting can bring the sales incentive as expense in the period for which the related sales are made. In contrast, cash accounting shows expenses only in the month in which they are paid. Hence, it is not possible for cash accounting to follow the matching priciple.