Question

Discuss the following concepts: (10)
Realization concept
Matching concept

Answer 1

REALIZATION CONCEPT:

As per this concept revenue can be recognised only when the goods and services associated with the revenue has been delivered or rendered.

Therefore revenue can be recognised only if the same has been earned or received.

Auditors verifies this principle to ensure that whether the revenues booked by a client are valid.

Example:

A customer pays $ 6000 in advance for a full year of software support.

The software provider cannot not realize the $ 6000 of revenue until it has rendered the full services.

  

MATCHING CONCEPT:

This concept makes ensure that the revenues and expenses are recognized in the same period.

It means that the revenue and expenses should be recorded in the books at the same time.

This concept follows the accrual basis of accounting.

In short it means that the expenses are incurred by an organisation must be recordedin the profit and loss statement in the acounting period in which the revenue to these expenses is earned.

Matching concept results in a fair presentation of the financial statements of an organisation.

EXAMPLE:

A company purchased equipment costing $1,00,000 having useful life of 10 years. Depriciation is charged on straight line basis.

Therefore as per matching concept the company will charge depricitaion in 10 years and equal amount of $10,000 every year.