Here are some additional examples of the matching principle and the adjusting journal entries :. Your current pay period ends on April 24, but your next pay date is May 1. This accrual reflects the correct amount of payroll expenses for the month of April.
This entry will need to be reversed in May, or May payroll expenses will be overstated. Depreciation is the expensing of an asset over its useful life. Depreciation expense reduces income for each period that the expense is recorded. For instance, you purchase a new conveyor belt for your factory. By using the belt in the production process, the belt will be providing monetary benefits to your business.
Expensing a portion of the cost of the conveyor belt over its useful life, you will be using the matching principle as you match any revenue earned with the expense of the asset throughout the life of the asset. Like the payroll accrual, this entry will need to be reversed in May, when the actual commission expense is paid.
Business expense categories such as prepaid expenses use the matching principle in similar fashion as depreciation. This will require two initial journal entries in the month of January, followed by a recurring journal entry for February through December. Instead of expensing this directly to rent, you will record it as prepaid rent.
The following journal entry will be recorded each accounting period. This journal entry displays the rent expense for the month, while reducing the prepaid rent account. This recurring journal entry will be made for each subsequent accounting period until the prepaid rent account has been depleted, which will be in December. Using the matching principle, accounting costs and revenues will be accurate, rather than under- or over-stated. For example, when managing revenue, matching principle usage ensures that any expense incurred in the production of that revenue is properly accounted for in the month that the revenue is generated.
Using the matching principle, costs are also properly accounted for, resulting in more accurate financial statements. It does matter what type of accounting method you employ when using the matching principle.
Only the accrual accounting method is able to use the matching principle, since cash accounting does not use the revenue recognition principle that accrual accounting uses. Are you paying more in taxes than you need to? Every dollar makes a difference, and you can save more of them by taking ALL the tax deductions available to your business. In this page report, we've outlined the top 25 business tax deductions you could be taking and 5 to watch out for! The Motley Fool has a Disclosure Policy.
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For enterprise Overview Reduce churn Reduce international barriers Reduce operational costs Reduce time to get paid Reduce conversion risk. Breadcrumb Resources Accountants. Table of contents. Understanding the matching principle The matching principle is part of the Generally Accepted Accounting Principles GAAP , based on the cause-and-effect relationship between spending and earning.
What is revenue recognition? A company is free to adopt the most appropriate depreciation method for its business operations. So, companies can choose a method that allocates asset cost to accounting periods according to benefits received from the use of the asset. Most companies use the straight-line method for financial reporting purposes, but they may also use different methods for different assets.
The most important criteria to follow: Use a depreciation method that allocates asset cost to accounting periods in a systematic and rational manner. The following four methods allocate asset cost in a systematic and rational manner: straight line, units of production, sum-of-years-digits, and double-declining balance. Here is an example of how to calculate depreciation expense under the straight-line method. Here is an example of how to calculate depreciation expense under the units of production.
First, calculate the depreciation per unit:. Here is an example of how to calculate depreciation expense under the sum-of-years-digits. Second, calculate the depreciation expense for year To calculate depreciation using the double-declining method, its possible to double the amount of depreciation expense under the straight-line method.
To do this, divide per cent by the number of years of useful life of the asset. Then, multiply this rate by 2. Next, apply the resulting double-declining rate to the declining book value of the asset cost subtracted by accumulated depreciation. Ignore salvage value in making the calculations.
At the point where book value is equal to the salvage value, no more depreciation is taken. Differentiate between the straight-line, units of production, sum of the years digits and double declining methods of calculating depreciation. Some of the most common methods used to calculate depreciation are straight-line, units-of-production, sum-of-years digits, and double-declining balance, an accelerated depreciation method. There are several asset depreciation methods to choose from. Straight-line depreciation has been the most widely used depreciation method in the U.
An example of how to calculate depreciation expense under the straight-line method — assume a purchased truck is valued at USD 10,, has a residual value of USD 5,, and a useful life of 5 years.
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