Question

what are some major and minor solutions a company can take if they violate the matching principle in finance?

Answer 1

Matching Principle- It is the accounting principle that matches revenues with expenditures.

Matching principle differs in cash and accrual basis accounting. In cash based accounting principle, revenue and expenditures are recognized when the actual cash is received or paid while in accrual basis principle, the revenues and expenditures are recorded when they are recognized.

Matching principle can be violated sometimes, if other concepts like Materiality is concerned.

Example: If ABC is a Billionaire company, it buys a machine for $1000 that has an estimated useful life of 5 years. According to matching principle, you have to spread the cost of machine over the five years. Company of that big size, $1000 is immaterial and thus company can decide that, the purchase is below our materiality threshold and expense it entirely upon purchase.

Sometimes big companies violate the fundamental principles of accounting. Companies are eager to record revenue but do not record expenses of very less amount.

Companies should not violate matching or any other principle because they may be charged heavy penalties if the violation comes in picture.