Question

• What would be the effect of removing either the Matching Principle or the Revenue Recognition Principle from the process? Use a concrete example of how doing so might affect accounting in a given period.Respond to your classmates’ postings by commenting on what might happen, if expenses are recognized over a period that is longer or shorter than that used for revenues.

Answer 1

Revenue Recognition

Revenue recognition covers the tools, procedures and guidelines a business follows to record income data. Generally, a company can recognize revenue if it fulfills its part of the underlying contractual agreement, whether it be delivering a product or providing a service. For example, an organization's revenue recording procedures may require that a bookkeeper post income data as soon as a customer takes possession of goods and the shipping company notifies salespeople and in-house treasurers

Matching Principle

The matching principle requires that a company tie revenue it generates during a given period -- say a month, quarter or fiscal year -- with expenses it incurred to reap that revenue. The principle also can apply to a project or long-term initiative -- say, the construction of a highway. Matching revenue items with operating expenses enables financial managers to accurately calculate how much money a business makes on a project or product, taking into account cash and noncash expenses, such as depreciation and amortization

Affect on accounting on removing either the matching priciple or revenue recognition:

Assume you’re running an estate agent business The agents all work on a commission basis and will be paid 10% of any revenue resulting from the sale of houses in their portfolio.

Commission is paid to the agents one month in arrears on the last day of each month – so they’re paid their commission from February at the end of March. If Dave (they’re always called Dave) has brought in £20,000 in sales revenue in February, he’ll be due a payment of £2k commission on top of his basic salary on 31 March

If we apply the matching principle, we now need to record that £2k of commission expense in the February income statement, alongside the £20,000 of sales income. The way to do this is with an ‘adjusting entry’, which does exactly what it says on the tin – it adjusts the entry for the last day of February so that it debits your commission expense and credits your commission payable. Remember, with double-entry bookkeeping, any cash that goes out has to be matched with the relevant transaction coming in.

Well, without applying the matching principle, you’d report the £2k of commission expense in March (the month you’ve actually paid it to Dave) rather than in February (when the sales were made, the expense was generated and the liability was incurred).

Hence if you expense are recognised over a period that is longer or shorter that that used for revenues you’d end up with a profit and loss statement that didn’t give a true reflection

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