what is the matching concept of finanacial accounting?

Question

give examples

Answer 1

The matching concept has to do with tying revenues and expenses to the correct accounting period.

Example 1: Assume you have a 12/31 year end. You receive an invoice on 1/7/2007 for $1,000 worth of widgets. The invoice date is 12/30/2006. Because the order was placed before 12/31, the invoice should be included in 2006 records, not 2007. You are matching the purchase of the widgets to the correct time period. The entry would be to debit inventory (or widget expense if it's not an inventory item) and credit accounts payable. When the invoice is paid in January, you will debit accounts payable and credit cash.

Example 2: You pay your annual business insurance of $2,400 on 11/19/2006. The policy runs from 12/1/2006 to 11/30/2007. You will not expense the entire cost of insurance in 2006, since 11 months' worth of the expense belongs to 2007. The Nov entry will be a debit to prepaid expenses (a current asset) and a credit to cash. Then, from 12/2006 through 11/2007 you will post a debit to Insurance Expense and a credit to Prepaid Expenses for $200 (1/12th of the insurance cost).

Hope that helps!