It should be mentioned though that it’s important to look at the cash flow statement in conjunction with the income statement.Whatever costs have been incurred for the purpose of earning that revenue is included in the expenses for the period in which the credit for the income is taken.A cosmetics company uses sales representatives, who earn a 10% commission on their sales at the end of each month. Documents For Your BusinessĪ salesman earns a 5% commission on sales shipped and recorded in January. The matching principle allows an asset to be distributed and matched over the course of its useful life in order to balance the cost over a given period. Designed to be used with accrual accounting, the matching principle is never used in cash accounting. The matching principle helps businesses avoid misstating profits for a period.Įxpensing 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. Recognizing the expenses at the wrong time may distort the financial statements greatly and provide an inaccurate financial position of the business. Rather it records the cost of each cartridge on the income statement when the cartridge is sold.
If an ink-and-toner company buys a truckload of cartridges in June to resell to customers over the next several months, it does not record the cost of all those cartridges in June. All this means is that the accountants figure out how long the asset is likely to be in use, take the appropriate fraction of its total cost, and count that amount as an expense on the income statement. Depreciation is the “expensing” of a physical asset, such as a truck or a machine, over its estimated useful life.
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