Question

• Company A did not adhere to the matching and realization principles. What would the impact be to the financial statements?
• Under what conditions would a company intentionally choose not to adhere to the matching and realization principle? What are some ethical concerns with an organization taking such an action?

Answer 1

Solution. Firstly, we will define the the term realization principle. Under realization principle, a company needs to recognize revenue only once such revenue associated goods and services have been delivered or provided. And matching principle requires a company to deduct expenses incurred in production from revenues to calculate net income.It is important for a given company to properly match,record and analyse its expenses and revenues for an accounting period.

As given above,company A did not adhere to the matching and realization principles.It implies company A does not reports an expense on its income statement under period during which related revenues generated which is accrual basis of accounting and adjusting entries.

Impact of not adhering to the matching and realization principles by company A are enlisted below:

a.It will lead to accounting issues relating to measurement and presentation of its financial statements and performance.Little utility in decision making functions.

b. There will be no estimation calculated and recorded for doubtful accounts encompassing past experience and economic conditions, which will result in reduction of gross revenue to net realizable revenue.

c.It will lead to overstatement of revenues as it will ignore doubtful accounts.

Conditions under which a company intentionally choose not to adhere to the matching and realization principle are enlisted below:

1.To provide/display manipulative financial statements to gain stakeholder's.

2.To record and analyse only actual and factual transactions done by a company which can be easily verified to facilitate its operations.

3.Recording done in this case by a company will incur least possible cost because it ignores potential doubtful accounts during an accounting period.

Ethical concerns with an organization taking such an action are enlisted down:

A.Overstatement of revenues will lead to loss in stakeholder's trust in the company and can call for penalties of offences.

B.It can lead to suspension of company's activities for breaking or not adhering to accounting principles and regulations.