Question

Identify and explain the expense recognition principle, also called the matching principle

Answer 1

Matching principles states that revenue shall be match with its expense for a financial period.

Inorder to record correct revenue it has to book expense which are incurred to earn that revenue.

If expense are not recorded then it will not provide true information regarding profitability of the company.

Inorder to avoid misstatements company has to book correct expense as if it will book higher expense it will lead to understatement of current year profit , in reverse if company will book less expense it will lead to overstatement of profit both situation are not showing true picture of the company.

Example : a ltd purchase goods for 1000 sales 1500 cost 800 in order to show correct profit company has to show

sales for 1500 cost of goods sold for 800 it means company is following matching principle concept.

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