The Relationship Between the Matching Principle and Accounting Period Assumption

The Relationship Between the Matching Principle and Accounting Period Assumption

The matching principle and accounting period assumption are the assumptions of income measurement when properly measuring net business income (Also see 4 Benefits of Good Bookkeeping). These two presumptions affect the revenues and expenses amount.

Through these two assumptions, you can divide the operational business activities into periods so that you could assign revenues and expenses in a specific accounting duration. If an accounting period that consists of 12 months, it is known as a fiscal year, whereas an accounting period that is less than one year is known as the interim period.

In spite of the simplicity of the accounting duration assumption, some transactions could not be assigned to a specific accounting duration. You need to estimate and follow the assumption of periodicity to ensure a systematic collection of expenses and revenues. For instance, depreciation expenses related to your company and other fixed assets in the Balance Sheet (Also see The Difference Between Trial Balance and Balance Sheet) depend on your estimation of how many years of using the fixed asset.

The matching concept needs you to record the expenditure in the same period as the earnings that was produced as an outcome of incurring the cost. For example, if you invest RM300 in an oven with the goal of broadening your baking company, and receive RM465 revenue, you need to record the income and the expense in the same accounting duration.
If the expense and the revenue are not related, they can be assigned to various accounting durations in a systematic method (Also see 3 Biggest Myths About Accounting). Examples of unrelated income and expenditure are the interest revenue from a financial investment and amortization cost.

It is clear that the matching concept depends on the accounting duration assumption. The procedure of assigning expenditures and income to a specific accounting duration needs you to identify (assumption) the length of the accounting duration.

Both the matching principle and the accounting period assumption are associated with the going concern assumption, which is an assumption used in income measurement. When you assign revenues and expenses in a specific accounting duration, you have to identify the number of accounting periods, the accounting duration assumption, assumptions of going concern and the matching principle.

These concepts might seem complicated, but they play essential roles in accounting. Therefore, do not hesitate to reach out to any accounting firm in Johor Bahru for further guidance.

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