Discuss the matching principle. Why is it so fundamental to accrual accounting?

Expert Solution

Let's start with an example. Your company has purchased a BMW for $60,000 today. You have a fair estimation that this car is going to help you in your business for 10 years. Thus, you will consider the depreciation of $6000($60000/10) every year for 10 years. This is because of the Matching Principle. You are matching the expenses of the current year to get the correct value of profits of the company. Matching Principle is fundamental to Accrual Accounting because it accounts for all the expenses that are incurred in this year with the incomes of that year.

Just like in the example of purchased BMW, we considered only $6000 for the current year and not the whole $60,000. Since the car was going to help us for 10 years, we have distributed the expenses. Accrual accounting removes the drawbacks of Cash Accounting. That means, even if our expenses are going to be paid in the later year, we have to consider the part of expenses that belong to this year.

ekkarill92 answered 1 year ago

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