Question

Considering the three types of depreciation methods(straight-line method, double-declining method and units-of-activity depreciation method), briefly explain the role of the matching principle in accounting for long-lived assets.

Answer 1

As per matching principle, revenue and expense of a particular period should match. This is easy to match for normal expenses which belong to a particular period. However, in case of assets who has useful life of more than 1 year, it is very difficult to match expenses and revenue. For example, asset purchased has useful life of 10 year. We will discard the asset at the end of 10 year. But revenue is generated every year. Therefore, in order to record the expenditure every year, we use depreciation methods like straight line method, double declining method, and units of activity method.

This helps in applying matching principle for long lived assets.

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