![]() ![]() This is technically the definition of accrual accounting which is the polar opposite of cash accounting. That’s right! We want to consistently match the revenues with costs at the time the revenue is earned, regardless of when the money comes or goes. Here comes the confusing part, match all revenues with costs “regardless of when the money exchanges hands.” The matching principle states, in order to have meaningful financial information we must match all revenues with their costs at the time the revenue was earned. ![]() What does the matching principle mean? Why is it so important to grasp if you want to be a leader who has or wants financial leadership skills? The matching principle, because of its name and the definition, is a bit confusing at first glance. That is the matching principle getting abused! Here is what it’s all about and how to use it properly. This was probably because someone else lost the invoice or failed to put it through to accounts payable. ![]() You most likely have endured the wrath of someone when the financial statement came out in your hotel and you had expenses that month from a few months back. So read on and get your schtick t ogether. These principles are universal and without them, you’re akin to a plumber who doesn’t understand why water flows the way it does. Being a financial leader means you understand and employ business principle s. Some of you are probably thinking this is for the bean counters and the propeller heads to chew on. Grasp this and you are well on your way to understanding the other principles and most importantly putting these principles to work in your day-to-day hotel leadership role. The profit and loss statement cannot exist and be in any way accurate without using the matching principle every step of the way. However, matching principle would also necessitate the recognition of deferred tax in the accounting periods in which the temporary differences arise so as to ‘match’ the accounting profits with the tax charge recognized in the accounting period to the extent of the temporary differences.I tell my Introductory Hospitality Financial Leadership Workshop participants that the concept behind the matching principle is “the most important concept today.” Why? When it comes to producing financial information, it’s the cornerstone of understanding why we do almost everything the way we do it in the business world. For example, accruals basis of accounting requires the recognition of the estimated tax expense in the current accounting period even though the actual settlement of the provision may occur in the subsequent period. However, the matching principle is a further refinement of the accruals concept. Accruals basis of accounting is therefore similar to the matching principle in that both tend to dissolve the use of cash basis of accounting. Accruals basis of accounting requires recognition of income and expenses in the accounting periods to which they relate rather than on cash basis. In the accounting community, the expressions ‘matching principle’ and ‘accruals basis of accounting’ are often used interchangeably. Matching principle therefore results in the presentation of a more balanced and consistent view of the financial performance of an organization than would result from the use of cash basis of accounting. Depreciation ensures that the cost of fixed assets is not charged to the profit & loss at once but is ‘matched’ against economic benefits (revenue or cost savings) earned from the asset’s use over several accounting periods. Depreciation results in a systematic charge of the cost of a fixed asset to the income statement over several accounting periods spanning the asset’s useful life during which it is expected to generate economic benefits for the entity. Similarly, accrued expenses are charged in the income statement in which they are incurred to match them with the current period’s revenue.Ī major development from the application of matching principle is the use of depreciation in the accounting for non-current assets. Application of matching principle results in the deferral of prepaid expenses in order to match them with the revenue earned in future periods. accrued expenses) and the charge to income statement of expenses paid in respect of future periods (i.e. This resulted in non recognition of expenses incurred but not paid for during an accounting period (i.e. Prior to the application of the matching principle, expenses were charged to the income statement in the accounting period in which they were paid irrespective of whether they relate to the revenue earned during that period. ![]()
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